PJM Cartel Getting Cartelier

Remember this post, What Is PJM, back in 2009?  Here is the dictionary definition of a cartel that I provided in that post:

cartel -2 : a combination of independent commercial or industrial enterprises designed to limit competition or fix prices

Now, click on this link to RTO Insider’s new post “DOJ Probing Interconnection Process in Exelon-Pepco Merger”.  This story is about the US Justice Department’s anti-trust investigation of PJM.

RTO Insider starts with this great graphic:

And-Then-There-Were-Four-Source-Monitoring-Analytics

So we see that if the Exelon/Pepco merger goes through, the holding companies that control the big generators in the MAAC interconnection queue will fall from five to four.

The Justice Department is investigating how holding companies in PJM’s MAAC sub-region (essentially the Mid-Atlantic states from NJ to MD) use their ownership of both transmission systems and generating plants to create difficulties for their competitors who are seeking to build new generation in the MAAC sub-region.  Transmission owners control the requirements for interconnection with new plants.  The big five (maybe soon to be big four) use this power to limit competition in the MAAC sub-region.

RTO Insider points to PJM Market Monitor Joe Bowring’s past objections to this situation:

Market Monitor Joe Bowring declined to comment yesterday on the department’s inquiry. But the Monitor has been recommending since 2013 that PJM outsource interconnection studies to an independent party to avoid potential conflicts of interest.

“Currently, these studies are performed by incumbent transmission owners under PJM’s direction. This creates potential conflicts of interest, particularly when transmission owners are vertically integrated and the owner of transmission also owns generation,” the Monitor said in the third-quarter report.

“There is also a potential conflict of interest when the transmission owner evaluates the interconnection requirements of new generation which is part of the same company,” the report added.

Go back and look at that definition of “cartel.” Did you catch the phrase “designed to limit competition”?  That’s what this is all about.

I think it is hilarious that Joe Bowring refers to these practices as “potential” conflicts of interest.  Potential?  They have been going on for years, ever since PJM and other regional transmission organizations arose from the ashes of deregulation, with FERC’s blessing.

Speaking of FERC, the Justice Department’s investigation began just five days after FERC announced that it approved the Exelon/Pepco merger.

In its Nov. 20 order, FERC indicated it did not have any anticompetitive concerns with the Pepco acquisition. (See FERC Approves Exelon-Pepco Merger.)

Dismissing concerns of market power, possible rate climbs and suppressed competition, the commission approved the pending acquisition without discussion. Its written decision made clear it didn’t see any market issues with the acquisition, in part because Pepco holds only a negligible amount of generation. “While the commission is aware that Exelon will be a member with more assets after the merger, there is nothing in the record of this proceeding to indicate Exelon will have excessive influence over the stakeholder process or the independence of PJM.”

In other words, FERC said, “Nothing to see here, just keep moving.”  The Justice Department apparently thought otherwise.

The Justice Department investigation is a big deal, and could throw a real monkey wrench in Exelon’s attempt to swallow Pepco.

This situation is the flip side of what happened in the PJM transmission line fiascos like PATH and TrAIL: PJM’s transmission planners colluded with big generators (AEP and FirstEnergy) to rig new transmission projects to serve those generators existing power plants.  Cartels are truly wonderful things, if you are a member of one.

Hats off to RTO Insider’s great coverage of more PJM fakery.

New Testimony Filed in PATH Cost Recovery Cases at FERC

AEP and FirstEnergy want $121 million (and more) from all rate payers in PJM Interconnection to cover their stranded capital costs (the abandonment case) and operating costs (the formal challenges case) on the failed PATH transmission project.  Remember that this boondoggle was created by the Energy Policy Act, inspired by the Cheney administration, and passed by the Republican Congress in 2005.  The 2005 Energy Policy Act allowed certain anointed transmission projects to charge all their costs to rate payers, even if they were never built – a good deal for power companies, not so good for rate payers.  You can’t find a better example of money for nothing.

While I am still technically an intervenor in the PATH abandonment case at FERC, I am no longer an active participant.  Last Friday was the deadline for testimony by the remaining active participants in the cases: Keryn Newman and Ali Haverty in the formal challenge case and a group of state public service commissions and consumer advocates (with the conspicuous exception of the WV PSC) as well as the staff of FERC itself.

Pro se intervenor Keryn Newman filed testimony on behalf of herself and my neighbor Alison Haverty in their formal challenge to expenses charged by PATH to rate payers from 2009 to 2011.  As they have all along, Keryn and Ali maintained in their testimony that PATH charges for lobbying and fake front groups should be borne by AEP/FE shareholders and not PJM rate payers.  Here is a link to their testimony.

FERC staff analysts also filed their testimony last Friday.  Staff witness Jean Miller appeared to agree with Keryn and Ali that PATH had illegally charged rate payers for their PR and lobbying costs.  Keryn’s  and Ali’s challenges only covered the years 2009-2011.  Ms. Miller testified that PATH’s 2008 costs should also be refunded to rate payers.  Here is a link to Ms. Miller’s testimony.  FERC expert Craig Deters also filed testimony that fills out the evidence Ms. Miller presented.  Here is a link to his testimony.

Staff witness Robert Keyton attacked testimony provided earlier by AEP/FE concerning the return on equity and debt costs that they were proposing the charge rate payers.  Most of this discussion is pretty abstruse and, as Mr. Keyton himself points out, largely hypothetical, because the front companies for PATH created by AEP/FE never produced anything and never borrowed any money, and are now defunct.  Here is a link to Mr. Keyton’s testimony.

The state agencies also filed some excellent testimony by transmission expert Peter Lanzalotta.  Mr. Lanzalotta basically testified that the AEP/FE should have pulled the plug on PATH after the East Virginia State Corporation Commission rejected the companies’ claim that PATH was needed to resolve reliability problems on the PJM system.

The summary in the introduction to Mr. Lanzalotta’s testimony tells the tale:

Mr. Lanzalotta concludes that PATH’s recommendation to Virginia that PATH be allowed to proceed while waiting for the 2010 RTEP to determine the need for the Project was not prudent.

If PATH had successfully recommended that it would be prudent to suspend the Project at the beginning of 2010, at least a year earlier than it actually was, then the abandonment costs would have been about $29 million lower than they actually were.

Beyond PATH’s 2010 recommendation that it be allowed to proceed, the escalation of PATH’s costs from its inception through its multiple delays were in excess of typical transmission cost escalation over the same period. Based on the Handy Whitman Cost Trends for Electric Utility Construction, the amount of excessive spending on the PATH Project is estimated to be $4.3 million.

The reference to prudence is important, because FERC rules require that rate payers can only be charged with costs that were prudently incurred by the power company.  Mr. Lanzalotta is saying here that more than $30 million for which AEP/FE want to charge rate payers violates FERC rules, and must be paid only by AEP/FE shareholders.

This point has been made repeatedly throughout the case by me and by other intervenors.  Mr. Lanzalotta sums it up nicely.  You can see his testimony at this link.

Those of you who fought the PATH line in the WV PSC will appreciate the testimony of Randall Woolridge, on behalf of the state agencies.  Mr. Woolridge provides an analysis of the exorbitant legal costs for which AEP/FE are trying to charge rate payers.  The power companies had the gall to redact important information from the records they provided to the state agencies in discovery.  Mr. Woolridge states that his analysis was incomplete, because he only received the unredacted copies of lawyers’ records two days before his testimony was due.

The final hearing in this case, dockets ER09-1256 and ER12-2708, isn’t until March 24, 2015.  A final decision by the Commission is due on July 31, 2015.

Capacity Markets: Money for Nothing

The American Public Power Association has published its latest biennial report on the impacts of mandatory capacity markets.  This report is not a theoretical analysis.  It looks at individual projects built in 2013 and how they were financed.  Most of the 24 page report is appendices with tables describing the new generation plants built in 2013.  As in their 2012 report, APPA concludes that, particularly in terms of stimulating new generation in areas where it is needed, capacity markets run by RTOs have almost no impact on creating new generation.

As was found in the analysis of 2011 generation, almost all new capacity was constructed under a long-term contract or ownership. Just 2.4 percent of the new capacity was built for sale into a market, a number that includes new facilities for which no information could be found about the contracts. Moreover, when broken down geographically, only 6 percent of all capacity constructed in 2013 was built within the footprint of the RTOs with mandatory capacity markets.
APPA thus found that all of the electric industry’s claims about capacity markets stimulating new investment are just wrong.  Who are the members that control the RTOs?  The big boys in an RTO are the holding companies that own a lot of existing generation capacity.  They have designed the capacity markets not to help new competitors enter their markets.  The incumbent generators design the markets to line their own pockets.
Are the capacity markets the least-cost means to achieve reliability?
These constructs are costing consumers billions of dollars for little in return, for the following reasons:
Different resources have different costs.
In these markets, a 50-year old coal plant is paid the same amount per MW and for the same duration as is a brand new highly efficient combined-cycle natural gas plant as is an agreement by a factory to curtail load when needed. As a result, excess windfall revenue is paid to the older depreciated plants and the revenue stream is not stable enough to attract investors in new resources.  The bulk of revenue has been paid to existing plants.  In the PJM Interconnection (primarily covering Maryland, New Jersey, Pennsylvania, Virginia, West Virginia, Ohio, northern Illinois, and Delaware), $72 billion has been paid or will be paid by consumers to generators and other capacity providers. Yet over 90 percent of this revenue has gone to existing generation, although many older plants have paid off much of their fixed costs. Moreover, most of the new generation capacity that has been built was done so under utility ownership and long-term contracts, not as a result of capacity market payments.
Capacity markets do not ensure an appropriate mix of resource types.
Because the capacity markets do not distinguish between technology types or specific locations on the grid, critical needs are not addressed, including adequate flexible ramping capability to match the variability of renewable resources, reliability gaps created by retiring coal plants, the coordination of natural gas infrastructure and delivery with the significant expansion of natural gas generation. As a result, the RTOs often create systems of side payments to ensure reliability, such as direct payments through what are known as reliability-must-run agreements to coal plants to remain in place to ensure reliability.
Price signals are not effective.
If transmission congestion limits the ability of capacity in one area to deliver lower cost power to another zone, the more congested zones may have a higher price. The theory behind zonal price differentials is that higher prices will act as a “signal” for the development of new generation or transmission. But such higher prices are not effective signals because owners of generation have no financial interest in building new resources and lowering prices for their existing units; investors seek steady and predictable revenue flows, not fluctuating prices; and many other factors influence the decision to build, including land and transmission availability, local acceptance, and environmental rules. Transmission construction may alleviate these price differentials, meaning that consumer paid both for higher prices and for the cost of the transmission.
So APPA concludes that good old fashioned contracts between a seller and a buyer (bilateral contracts) and internal investment by power companies provide the long term financial stability that investors need to build power plants.  Capacity markets can never provide that kind of stability and assurance of cash flow.  All capacity markets do is provide a smokescreen for power companies to pick rate payer pockets, to the tune of $72 billion in PJM alone, according to the report.
Of course, generation capacity is largely a problem because of peaks in demand in most US RTOs.  The US electrical load is characterized by wide swings from normal base load to very short periods of very high load.  There are winter peaks, caused mainly by heating, and summer peaks, caused mainly by cooling.  But what if we tackled the capacity problem by tackling what causes it – the demand problem.  What if we did what the Danes did, and eliminated electric heating almost entirely by using gas combustion and “waste” heat form power plants and manufacturing businesses?  Then the winter peak goes away.
Summer peak is a little different, because that is caused by cooling, which is tied pretty tightly to electricity by air conditioning technology.  Winter peak could be eliminated entirely by shifting all electric heating systems to other heating sources.
Heating with electricity is also phenomenally inefficient.  Eliminating electric heat would eliminate the need for rate payers to pay for thousands of megawatts of generating capacity and transmission lines during times of even normal load.
But in the US, there is no planning across industries.  There is no attempt to reduce electrical use by shifting technologies from the electrical sector to the natural gas sector by expanding heating.  Using natural gas or biomass combustion for direct heating is much more efficient than burning gas or biomass in a power plant, even a highly efficient one, sending that electricity hundreds of miles and running it through a resistance coil in a furnace.  This lack of planning across sectors has also led to the absurd situation last winter in which large parts of the US were left with shortages of both electricity and natural gas for heating because so much electricity is now generated by natural gas power plants.
So capacity markets aren’t even the best way of planning capacity for peak load.  Here too, capacity markets are money for nothing.

TrAILCo Has Too Much Capital — FirstEnergy Wants It

What a great way to start an article:

Insisting that the move will raise no risk of “corporate officials raiding corporate coffers for their personal financial benefit,” Trans-Allegheny Interstate Line Co. asked FERC to confirm that it can pay periodic dividends out of paid-in capital to its parent, FirstEnergy Transmission LLC, without violating the Federal Power Act.

That was part of outlaw FirstEnergy’s appeal to FERC to allow it to withdraw capital from its transmission subsidiary TrAILCo.  TRAILCo is filling up so fast with its extra-high rate payer subsidies from FERC for its obsolete transmission lines that failing FirstEnergy wants to get its hands on some of the loot.  Note also that the quote about corporate raiding was written by FirstEnergy’s own lawyers in the company’s FERC filing.

Back in 2001, Dick Cheney and Enron’s Kenny Lay whined in their secret energy task force report that the US transmission infrastructure was falling apart because there weren’t enough profit incentives in place for investors.  The Republican-controlled Congress obliged them in the 2005 Energy Policy Act by creating rate payer financed giveaways to high voltage bulk transmission owners. TrAILCo’s TrAIL line through PA, WV and East VA was one of those lines guaranteed extra high profits.

A new report has been released by The Power Line’s own Cathy Kunkel and Tom Sanzillo for the Institute for Energy Economics and Financial Analysis about FirstEnergy’s desperate attempts to rescue itself from a financial death spiral.  They document how FE is grabbing for all the subsidies it can get its hands on and how it is attempting to suck capital from its profitable subsidiaries to shore up its obsolete coal-fired and nuke plants.  TrAILCo is about the only profitable part of FirstEnergy right now, and they want to loot that subsidiary too.

FirstEnergy’s financial condition has deteriorated since it merged with Allegheny, and its key financial metrics are on a downward trajectory. Over the past three years, it has experienced declining revenues, declining net income, declining stock price, declining dividends, and rising debt. It has retired 4,769 MW of merchant coal plants and has booked impairments totaling $1.1 billion against the value of its coal plants from 2011 to 2013. To shore up its balance sheet, FirstEnergy has relied heavily on “one-time resources,” including proceeds from asset sales and short-term borrowings. FirstEnergy’s poor financial performance stems from the underlying condition that the company’s business – the sale of electricity – is performing poorly and not generating sufficient revenue to cover expenses.
The original quote cited above refers to paying dividends from paid-in capital.  There is no such thing as paying dividends from paid-in capital in standard accounting practice.  When you take capital out of a company, you are simply taking capital out of a company.  This has nothing to do with dividends, which are paid as a share of annual profit or net income.  FE is raiding TrAILCo, plain and simple.

Without the Cheney/Lay-inspired rate payer subsidies, TrAILCo would just be another of FE’s failing business ventures.  Thanks to the 2005 Energy Policy Act, FE doesn’t have to liquidate TrAILCo because the subsidiary is actually an asset that is earning them money, unlike their coal and nuke plants.  Now FE wants FERC to let them milk their cash cow dry.

PJM Market Monitor Sees Exelon/PHI Merger as Threat to Power Markets

A recent story in industry journal SNL (subscription only) describes objections made by Joe Bowring, PJM Interconnection’s Market Monitor, to the Federal Energy Regulatory Commission about Exelon’s proposed purchase of PEPCO Holdings, Inc.

He said the move would eliminate a large independent transmission owner in PJM and place PHI’s assets under the control of a vertically integrated company. While the applicants said that should not be a concern since all the transmission assets involved will continue to be under PJM’s control after the transaction is consummated, Bowring said that alleged protection is “overstated.”

The monitor explained that PJM’s control over its members’ transmission facilities, while significant, is limited. Noting that participation in any RTO is voluntary, Bowring insisted that a large transmission owner can have significant leverage over the RTO in which it is a member because “like any organization, RTOs are concerned with protecting their size, scope and importance.”

“The greater the proportion of the RTO’s assets represented by the transmission owner, the greater the threat of exit to the RTO and the greater the potential influence of the transmission owner over the RTO governance and processes,” Bowring said.

In this case, Bowring said, a merged Exelon/PHI would account for 23.4% of transmission service credits collected from the PJM market. That much control would give the combined company “substantial and increased influence over decisions that directly relate to competition in PJM among developers of transmission projects.”

Specifically, Bowring predicted that a post-merger Exelon could use its responsibility to perform interconnection studies for generation to exert vertical market power to block potential wholesale competitors. He also said the consolidation of the ownership of transmission assets could create horizontal market power concerns because it “reduces the pool of companies that have the expertise to compete to build competitive transmission projects.”

Bowring’s objections all revolve around the point I have made many times on The Power Line – that PJM, and all other regional transmission organizations, is essentially a cartel designed to set prices and limit access to markets.

Power companies supported the so-called deregulation of US electricity in the 1980s and 1990s not to promote “free markets” but to shed themselves of unprofitable business structures and state regulation.  The growing number of mergers in the US electricity system today is focused on creating large, multi-state holding companies that once again control distribution, transmission and generation subsidiaries.  These holding companies, like AEP, FirstEnergy and Exelon, can now play off one market against another to exercise market power and maximize their profits.

Largely as a result of removing control of the bulk transmission system from state control, these holding companies used their leverage in the Cheney Administration to create a massive subsidy system based on radically expanded federal control of the planning and construction of high voltage transmission lines.  It is not surprising that transmission is the new gold mine for power company profits.  All of these subsidies are paid for by rate payers.

As Bowring points out, it is the control of both transmission and generation that gives the new holding companies their real market power in PJM.  PJM controls what new power plants are allowed to “interconnect” with the regional transmission system.  The RTO determines who wins and who loses, because without interconnection, a plant can’t sell its electricity.  And who controls PJM?  Its big holding company members who also own lots of obsolete and expensive generation.

Exelon has a particular problem.  It is one of the largest owners of nuclear power plants in the US.  It is even more difficult for nuclear power plants to ramp production up and down than it is for coal-fired plants.  Essentially, the nuclear dinosaurs must run all the time.  That means that they have to take whatever prices are available on the wholesale markets.  Increasingly, particularly with the growth of renewable power, which has zero fuel costs, there are times of day, particularly when wind farms are putting a lot of energy into the grid, when Exelon’s nuclear plants have to operate at a loss, because their operating costs are higher than the prices available to them in the market.

Stagnant demand, the growth of demand resources and the expansion of competition from solar, wind and more flexible natural gas plants force Exelon’s nuke plants to take major hits to their bottom lines.  PJM is on the verge of making big interconnection decisions for offshore wind farms.  If Exelon is allowed to merge with PHI and become a giant at the PJM cartel table, how enthusiastic do you think Exelon/PHI will be about letting large new offshore wind farms into its cozy PJM market?

Neither Exelon nor PEPCO Holdings controls any electric companies in WV, but their merger’s impact would raise WV rates through PJM’s cost recovery mechanisms.

FE & AEP Attack Net Metering in OH

FirstEnergy and AEP, the holding companies that control most of the electricity systems in OH and WV, are pushing to prevent solar power producers from being paid for their contribution to PJM’s capacity needs in OH.  Using  OH’s regulatory system to underpay small producers would also allow the small producers’ energy at a discount and sell that energy at a profit to their own customers.

Here is an excellent account of the situation in OH.

The EcoWatch story also covers FE’s attempts at FERC to block the sale of demand resources in PJM’s capacity markets.

Meanwhile, on the federal level, FirstEnergy’s ongoing FERC challenge aims to exclude demand response from the results of May’s capacity auction for 2017-2018.

“We believe that removing these demand resources from the capacity market is going to provide vital compensation for essential physical assets like nuclear, coal, [and] gas base load plants,” Colafella said. “It’s going to help foster properly functioning capacity markets.”

“Demand response presents absolutely zero reliability concerns,” Sawmiller noted. “It won’t freeze like a coal plant did during the polar vortex. In addition, it’s incredibly cheap. This applies downward pressure to capacity prices, lowering electric bills for all customers.”

“If FirstEnergy is able to reduce the amount of demand response that goes into these auctions, it will raise prices for customers,” Sawmiller added.

“Having demand response bid in lowers the price for all the generators that bid in,” Kushler agreed. Conversely, keeping demand response out would raise the auction’s closing price. In Kushler’s view, FirstEnergy’s attempt to exclude it is yet another “classic conflict of interest.”

The coal burning power companies like to tout their “steel in ground” as the ultimate in reliability, but Dan Sawmiller is right, coal does not do well in cold weather. Here is PJM’s report on the electric generation industries last January. The report highlights the fact that on January 7, 34% of the forced generation loss was from coal-fired plants.

So the AEP/FE, Kochtopus, Republican rollback of sane OH energy policy continues.

While in WV’s regulated market AEP and FE are shifting power plants from unregulated subsidiaries onto captive WV rate payers to  protect profits, in OH, the holding companies are manipulating rules under which their regulated retail companies operate to jack up profits for their unregulated generation companies.  In both states, both holding companies are playing rate payers and PSCs for chumps.

 

Federal 7th Circuit Rejects FERC/PJM Non-Reform of Transmission Cost Allocation

Federal court cases drag on forever.  Remember the 7th Circuit Appeals Court decision in 2009 throwing out PJM’s FERC-approved recovery of costs from all PJM rate payers for transmission lines that benefit only eastern PJM customers?  In that decision, the 7th Circuit remanded the case to FERC, ordering FERC and PJM to fix their cost recovery scheme so that only people who benefit from transmission lines like PATH would pay for them.

In response, FERC held a “paper hearing” to respond to the 7th Circuit.  In March 2013, FERC issued an order which the Commission claimed responded to the 7th Circuit’s concerns.  Except it didn’t.  It was the same old recycled crap in a new wrapper.

Yesterday, the same three judge panel, including Judge Posner, issued an order throwing out FERC’s new fake plan.  The order contains an excellent summary of the case history.  Judge Posner has a clear and non-legalese writing style that is refreshing.  This case is very important, because it attacks the bedrock of FERC’s plan to hide the rate impacts of its high voltage transmission schemes behind its “postage stamp” cost allocation.  Here is what Judge Posner concluded:

To summarize, the lines at issue in this case are part of a regional grid that includes the western utilities. But the lines at issue are all located in PJM’s eastern region, primarily benefit that region, and should not be allowed to shift a grossly disproportionate share of their costs to western utilities on which the eastern projects will confer only future, speculative, and limited benefits.

The petitions for review (from the original plaintiffs) are granted and the matter onceagain remanded to the Commission (FERC) for new proceedings.

Judge Posner agrees with those of us who opposed PATH because we would be paying with our electric rates and our land for a line that only benefited people to the east of us.  FERC and PJM are playing games with the 7th Circuit court.  The Commission and the RTO need to pull up their big boy pants and get cost recovery right.

This 7th Circuit case only applies to PJM’s pre-2013 transmission projects, like the ones it pushed in Project Mountaineer.  PJM has already abandoned its past practice of forcing every rate payer in its system to pay for high voltage transmission lines.  In 2013, PJM adopted, and FERC approved, a system that is a hybrid of the old (still wrong) “postage stamp” system and a formula that requires costs to be born only by those who benefit from a project.  This new system is not what it needs to be, but it is much more realistic than the old boondoggle system that the 7th Circuit has now rejected twice.

If PJM cannot please the 7th Circuit, will the court require PJM and the transmission companies like PPL and PSEG (Susquehanna-Roseland) and FirstEnergy (TrAIL) to disgorge all their ill-gotten gains in rate payer refunds?  We’ll see.