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.
 
 
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.
 
 
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.
 
 
...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.
 
 
FERC bad-boy Kevin Gates says he's going to create an animated monkey for his website that explains how to make money in PJM's badly-designed markets.
Gates therefore said he stands by his earlier statement that FERC created a market "where a monkey could have made money that summer" by randomly picking nodes, MWs, congestion caps and hours. "We now have the data and I intend to prove it empirically," Gates added. "Once I'm done with the analysis, I intend to create an animated monkey to put on my website to present the results of my work and help explain the market that FERC created."
But what kind of monkey?  Will it be a nice monkey?
Or will it be a naughty monkey?
I suppose it's all in your perspective. 

And, speaking of perspective, that SNL Financial article puts some of FERC's "evidence" against Gates into perspective.
For instance, staff said Chen and Powhatan's investors, including Gates, should have known that it was improper for Chen to submit trades in PJM's up-to congestion, or UTC, market on the funds' behalf just to maximize the rebates PJM gives market participants that use its transmission lines when it collects excess line-loss payments.

Staff further alleged that Gates and Chen suspected as much, citing an email exchange between the two parties suggesting that they "contact a law firm, the FERC, or PJM to try to get more insight into this issue." They never did, however, but instead decided to have Chen ramp up the trading activity, staff asserted.

Gates told SNL Energy that the problem with most of the emails and other information cited by staff to support its case is that they were taken out of context.

For instance, when asked if he indeed suspected that the types of trades in which Chen was engaging might be improper and why he did not seek advice on the issue, Gates recalled that the email exchange regarding the potential need for guidance took place in March 2010 and Chen did not begin trading in an allegedly illegal manner until the following June.

“The timing and the content of the email shows we weren't talking about Alan's trading at all — it was about the rebates themselves. We were concerned that FERC would try to retroactively take them back — not just for us, but for everyone," Gates said. He insisted that he never thought Chen's trading would be considered illegal.

Gates further explained that he did not contact an energy attorney at that time because he thought the possibility that FERC might punish market participants retroactively for flaws in existing rules was "preposterous when those rules were clearly approved." He also thought that while an attorney could quantify the risk or the likelihood that FERC may do so, contacting one would do nothing to protect him from that risk.

According to Gates, his decision not to seek legal advice at that time was the right one. He noted that after FERC in July 2011 tried to retroactively "claw-back those rebates" by ordering virtual (financial) traders such as Powhatan to return the previously refunded amounts, a federal appeals court in August 2013 remanded that decision, finding that the agency failed to justify its mandate. Moreover, Gates stressed that FERC staff has not alleged that any of Chen's trading activities prior to June 2010 were improper.
To be fair, SNL Financial also did an article featuring FERC's perspective, but that one is behind a pay wall, so I guess nobody cares...

Personally, I'm looking forward to the animated monkey!  I hope it's an evil monkey!  They're ever so much more fun!
 
 
Isn't that amazing?  FirstEnergy has learned to work faster for shale clients.  Remember that next time you want some service... pretend you're a shale gas company.

And here's another amazing fact:
Their promise and rapid pace of development happen to coincide with the Akron-based electricity company’s recent focus on making its transmission segment the lead revenue growth generator for FirstEnergy, where Mr. Bridenbaugh serves as vice president of transmission.
Serendipity, right?

So, who pays to supply electricity to new shale gas companies?  You do.
Most of the time, when the company upgrades a transmission line or builds a substation to service a new gas processing plant, the investment is recovered from the utilities that benefit from the upgrade.
Utilities.  Got that?  Not shale gas companies.

How much will you pay?
...the company has said it wants to retrench in its utility and transmission businesses, both of which provide a guaranteed rate of return. For transmission projects, the return is often in the double digits.
Lots.

Why are you paying?  Because the new shale gas companies make the existing grid unreliable, and you need reliability!  (which came first?  the chicken or the egg?)
Because the new, shale-related loads are springing up in rural areas with older or nonexistent infrastructure, the new pull on the lines often presents a reliability risk for other customers drawing electricity in the area. Therefore, many such projects end up going before PJM Interconnection, a Valley Forge-based organization that manages the nation’s largest grid, servicing 13 states in the northeast including Pennsylvania.

PJM has a formula to determine who’s responsible for the cost of upgrades.

Typically, for projects like those on FirstEnergy’s shale plate, it’s shared between the direct beneficiary — a compressor station or processing plant — and the regional utilities whose customers also see a benefit from improved service and reliability.
Hmm... I wonder if regional utilities want to pay half my electric bill this month?  Because, you know, I could jump up from my chair and turn on every electric appliance and light in the house right now.  And that might hurt regional reliability... right?
 
 
As if PJM's electric market rules aren't already complicated enough, now PJM is insisting that RPM participants follow rules that aren't even rules yet.

Well, yeah, we all know that PJM answers to no one.  No, really, a certain PJM employee actually told a reporter once, "PJM answers to no one," when he was trying to sell the PATH project to West Virginia citizens. 

And PJM's market monitor told a newspaper once, "following the rules does not mean you are not manipulating the market."

So, it appears that PJM gets to make up its own rules, often before or after the fact, and nobody can protect you, because PJM is omnipotent and all.  Following the tariff doesn't appear to offer any protection against being accused of manipulation.  And, now it seems that PJM members have obligations to abide by proposed rules that aren't even in the tariff...

Recently, PJM filed changes to the capacity market portion of its tariff which, if approved, will establish a deadline for data submittal.  The new deadline will occur in early January each year.  In its filing, PJM has asked FERC to approve the tariff revisions by April 1st. 

But, PJM and Monitoring Analytics seem to think the proposed portion of the tariff is already in effect and are requiring capacity suppliers to submit certain data now.  FERC has yet to approve these new rules!  But, what could happen if the new data is not submitted by the proposed deadline in January, even though the tariff revisions are proposed to be effective in April and are NOT YET IN EFFECT?  Could the market participant be referred to FERC under a tariff violation claim?

So, not only is it possible to be guilty of something without actually violating PJM's rules, it is now also unacceptable to violate new rules that are not yet in effect! 

I think the bloated bureaucracy that is PJM needs to be slimmed down and cleaned up, because free M&Ms only have so much charm.

 
 
Do you agree that the three market  participants he named were “bad eggs”?
Why or why not?
What kind of a question is that?  How are "bad eggs" legally defined?  Does FERC have an educated egg-dicator used to make this determination?
Those are the kind of questions FERC has been asking  folks not involved in its investigation as it tries to scrounge up some witnesses against Kevin Gates and Powhatan Energy Fund.  In November, FERC sent ten pages of questions (including the egg question, along with one about "bad apples") to a guy who talked to Kevin Gates about a job in the summer of 2010.  Bryan Hansen, who bravely chose not to be represented by a lawyer after FERC pounced on him, didn't seem to have much dirt to spill after all.

But FERC hit paydirt with another guy who was looking for work in 2010 -- the guy with the opinion about the eggs and apples.  In an email to Gates back in 2010, this guy worried that Alan Chen was going to "kill the goose that laid the golden egg," a badly-designed PJM market product that was profitable for everyone.  I think this guy was just watching too much Willy Wonka.


In the wake of FERC's December 18 Show Cause Order, the accused had 30 days to respond.  Gates, Chen and the companies requested a 30-day extension due to the holidays and new information that needed to be reviewed.  OE opposed it.  The Commission did what it often does... it split the baby and granted a 2-week extension.  The response is now due on Groundhog Day.  Auspicious!

FERC held a technical conference today about UTC transactions, where one of the panelists was from Twin Cities Power Holdings, LLC (any relation to the Twin Cities Power LLC that recently settled with FERC for $3.5M in a different market manipulation case?)  It seems that FERC and PJM are still trying to figure out the markets they have designed to "benefit consumers."  Maybe they should read the glossary at FERClitigation.com to figure some things out.

Meanwhile, it looks like Harry Reid's angry and sarcastic staffing services for federal energy commissions may be on the way out.

And new FERC Commissioner Collette Honorable, former chairwoman of the Arkansas Public Service Commission, is on the way in.  She's a breath of fresh air for this struggling federal commission.

Maybe she'll open her own twitter page, like Commissioner Moeller did last month.  He's tweeted four times (once about the Powhatan mess), has followed no one, but already has 192 followers, which I'm sure includes every suck up energy lawyer in DC, but probably not Harry Reid.  Isn't it nice to be so popular?
 
 
More bad decision-making on the part of the Illinois Commerce Commission brought to light, this time courtesy of the Request for Rehearing filed by Exelon subsidiary ComEd.

Because nobody trusts Clean Line Energy Partners to actually remain a merchant project, the ICC conditioned its recent approval on Clean Line having to come back before the ICC for approval before the cost of RICL can be allocated to Illinois ratepayers, either through PJM or MISO's planning process.

(Raise your hand if you suspect Clean Line is approaching the permitting and cost allocation process backwards -- getting its state permits first before approaching PJM and/or MISO to have its project added to the regional plan and cost allocated to consumers).

The allocation of transmission costs to ratepayers is a FERC-jurisdictional process.  It is not decided by individual states (except it may be addressed through the RTO planning process, but good luck there, Illinois, if RICL gets included in a regional plan).

ComEd has taken issue with this stipulation:
Throughout this proceeding RI has claimed that Illinois customers will not pay the
Project’s costs. Because this fact is critical not just to protect customers, but also underlies RI’s economic case, the Order includes a condition stating that RI must seek Commission approval “prior to recovering any Project costs from Illinois retail ratepayers through PJM or MISO regional cost  allocation[.]”  While ComEd agrees fully with the Commission’s intent, this condition cannot be relied upon to protect customers, for several reasons.

FERC has exclusive authority over  transmission rates under federal law. It is far
from clear that FERC or a federal court would find that Illinois can require an applicant to waive the ability to petition FERC to approve any specific type of transmission rate, or could enforce such a waiver against a FERC finding that it was “just and reasonable” to pass costs on to customers. 

Even if the Commission could void the CPCN if RI (or a successor) made such a request to FERC, it is not clear what effect that “remedy” would have on customers’ rates. By then, the costs would be incurred and the line would be transmitting power in interstate commerce.

The Order’s condition does not apply to other parties (e.g., generators, shippers) who
could ask FERC to modify the rate to shift costs to customers, even if RI never did.

Similarly, the Order does not limit the  authority of FERC itself, which could sua
sponte revise RI’s rates, either in a RI-specific or a more broadly based investigation
proceeding. FERC has the power to “determine the just and reasonable rate … to be
thereafter observed” (16 U.S.C § 824e (2012)) in response to such a complaint or
upon its own motion, not just a filing by RI.

At a minimum, given the critical importance of shielding Illinois customers from Project
costs, the viability of this condition as a means of protecting customers – and potential
alternatives including financial security – warrants deeper examination on rehearing.
In other words, the ICC has been had by empty promises.  FERC can order Illinois ratepayers to pick up the RICL costs and there's nothing the ICC can do about it, except be sucked into a prolonged legal battle at FERC. 

Meanwhile, the ICC's condition does NOTHING to protect ratepayers in other states from having the cost of RICL foisted upon them.

Let's hope the ICC thinks this one through a little more.