Electricity Markets

Kelly says FTR practices need to be looked at in wake of losses

Noting the “eye-popping losses” resulting from the default of a financial transmission rights trading company and the fact that load-serving entities including public power utilities are on the hook for losses from FTR-related defaults, Sue Kelly, President and CEO of the American Public Power Association, said that there is a strong argument to be made that financial entity participation in the wholesale markets, including FTR markets, should be investigated.

“I am personally very offended when financial players place losing FTR bets and then walk away and let load pay off the losses,” Kelly said on Sept. 5 at the Future Power Markets Summit, which took place in Washington, D.C.

Kelly said that the Association is concerned about rules for the trading and funding of FTRs, which are intended to allow load-serving entities and other market participants to hedge the costs of day-ahead transmission congestion.

The Association, she noted, has supported the California Independent System Operator’s efforts to improve its congestion revenue rights paradigm and reduce the payout from load to financial entities.

In late June, the Federal Energy Regulatory Commission accepted tariff amendment proposals by CAISO aimed at improving the efficiency of the ISO’s CRR auctions.

CRRs serve a similar function as FTRs in that they are financial instruments meant to hedge congestion costs associated with electricity delivery in the CAISO markets. The primary purpose of CRRs is to facilitate long-term contracting by load-serving entities and suppliers by permitting them to hedge congestion costs incurred in the day-ahead market.

PJM dealing with ‘eye-popping’ losses from trading firm’s default

Kelly noted that PJM, which is the grid operator for the mid-Atlantic region, is “sorting out the best way to manage the eye-popping losses” resulting from a GreenHat Energy default.

“I realize that PJM has to recover these costs from load because there’s really no other place to go,” Kelly said at the summit. “I appreciate that PJM is working with the customers to try and minimize the damage.”

But, Kelly continued, “You have to ask, why is this happening?” and “why doesn’t anybody investigate these practices when they happen?”

Kelly is concerned that “load is paying a high price for the liquidity that these entities add to the market and I just want to know -- where’s the outrage? Why am I the only one?”

PJM on June 21 declared that GreenHat was in default for not paying its $1.7 million weekly PJM invoice issued on June 5. Currently, PJM’s tariff requires the liquidation of the defaulted portfolio at the next available auction, although PJM had previously filed for a waiver of this obligation.

On July 26, PJM filed a request with FERC asking that the temporary obligation be waived such that PJM would only attempt to liquidate the FTR positions in the defaulted portfolio for one month forward in each of the FTR auctions to be conducted from July through October of 2018.

More recently, at the request of members, PJM on Aug. 23 asked FERC for approval to suspend the liquidation of FTRs until Nov. 30 while it decides how to approach the FTR liquidation from the default of GreenHat (additional background on the GreenHat situation is available on PJM’s website).

When asked about FTRs by an audience member, Kelly said that she fully appreciates “the value of a hedge and they are extremely necessary to load-serving entities to fulfill that function.”

What bothers Kelly is that while FTRs were developed for the benefit of load and entities that serve load, “you have all these other players who are in those markets and when they are able to pull dollars out” of markets, that comes at the expense of other parties on the other side of the hedge, which is generally load.

And then when companies such as GreenHat and the Tower Companies default, “they just default and walk away and we pay. So why is it that they win, they keep the money? They lose, we pay their losses?”

Kelly said that “the reason we’ve always been given is, ‘well, they provide liquidity in the market, they’re the other side of these trades,’ and there’s some markets where that is at least reasonably true. The FTR market? I’m not so sure.”

“I would just like to see this actually looked at by an independent, third party,” Kelly said. “There is a PhD dissertation out there waiting to be done,” or Congress could invoke its oversight authority, she went on to say.

In December 2007, PJM declared a major default by Power Edge, one of its members. At the time of the default, PJM estimated the magnitude of Power Edge’s default to be in the neighborhood of $80 million.

In March 2008, PJM filed a complaint against a group of entities (including Power Edge) collectively known as the Tower Companies alleging that the Tower Companies had manipulated PJM’s day-ahead energy and FTR markets.

The five stages of RTO grief

Meanwhile, Kelly noted that public power utilities located in RTOs have sought to reduce their power supply costs, or at least avoid cost increases while retaining public power’s unique business model and autonomy “and doing that has not always been easy.”

But, she added, “I’m not going to say that we’re RTO haters because we are not.” RTO-operated markets “certainly have problems,” but there are also benefits, with most of those benefits flowing from the energy markets.

RTO-run energy markets provide access to a greater variety of generation and demand-side resources, Kelly said, noting that public power utilities have benefitted in several ways including greater efficiency of centralized dispatch.

Public power has “been through the five stages of RTO grief,” she said. On the energy market side, “we’ve largely been through that. We’ve come to terms with the greater hassles and the complexities of living in an RTO market world.”

One of the ways this has been accomplished is by public power entities partnering with each other “to address these challenges together,” Kelly said, noting The Energy Authority as an example, which “assists many of us in dealing with RTO market activity.”

TEA is a public power-owned, nonprofit corporation with offices in Florida and Washington state and more than 50 public power clients.

Mandatory capacity markets

Kelly also pointed out RTO-run capacity constructs “have been a major focus of public power over the last decade. Our concerns are well known – volatile prices, frequently changing rules, increasing impediments to our ability to self-supply our own loads with our own resources.”

Mandatory capacity markets “are not even markets,” Kelly said. “They are administrative contrivances.”

FERC in late June rejected two alternative approaches filed by PJM to address the impact of state subsidies on PJM’s electric generation capacity market. At the same time, the Commission found that PJM’s existing capacity market rules are unjust and unreasonable under the Federal Power Act and must be modified. While rejecting PJM’s proposed changes, FERC made a preliminary finding that certain other changes to the current PJM capacity market rules may result in just and reasonable replacement PJM tariff provisions (Docket No. EL18-178).

FERC’s rationale for finding that the market rules are not just and reasonable was their failure “to protect the integrity of competition in the wholesale capacity market against unreasonable price distortions and cost shifts caused by out-of-market support…” Kelly noted that FERC is essentially saying that competition is not achieved because the RPM market does not contain sufficient protections to prop up capacity prices.

In a request for rehearing of FERC’s order, the Association and other public power entities said that FERC’s finding  could make the already-flawed PJM capacity construct “significantly worse.”

Kelly said that one of the primary flaws of capacity constructs is that every megawatt is treated equally. “It’s all fungible. One megawatt is the same as another. It doesn’t matter what type of fuel generates it,” she said. “In an ironic twist, both PJM and ISO New England have recently expressed concern that their capacity market constructs” don’t produce a resource mix with sufficient fuel diversity.

Kelly says it is time to rethink capacity markets

“After spending or committing over $130 billion in capacity payments in ISO New England and PJM, I think it is safe to say that almost nobody is happy with the state of those markets,” Kelly went on to say.

“We think it’s time to rethink them. We believe that a resource adequacy regime that’s based on longer term planning, bilateral contracting…and increased respect for state and local decision making and autonomy with a residual capacity market for those that feel the need to go there actually makes more sense.”

She pointed out that the Southwest Power Pool, the Midcontinent Independent System Operator and the California ISO continue to resist mandatory capacity markets. The Association recently argued that FERC should reject a complaint submitted by the owner of a power plant in California against CAISO that calls for the grid operator to implement mandatory centralized resource adequacy procurement.

The summit was co-sponsored by the Association, the American Wind Energy Association, the Large Public Power Council, National Rural Electric Cooperative Association, Solar Energy Industries Association, Energy Systems Integration Group and the American Council on Renewable Energy.