On January 10, 2020, FERC issued two separate orders approving Stipulation and Consent Agreements (“Agreements”) between the Office of Enforcement (“Enforcement”) and Emera Energy Incorporated (“Emera Energy”) and Exelon Generation Company, LLC (“Exelon”), respectively. Both Agreements relate to alleged violations of ISO New England Inc.’s (“ISO-NE”) Tariff. Specifically, with respect to Emera Energy, FERC alleged that Emera Energy violated the Tariff’s requirement that evidence supporting Fuel Price Adjustment Requests (“FPA Requests”) must reflect an arm’s length transaction. With respect to Exelon, FERC alleged that Exelon misreported the type and quantity of start-up fuel used by its Mystic 7 generating unit (“Mystic 7”). In both cases, FERC found that the Agreements were in the public interest and the Enforcement investigations were resolved on fair and equitable terms.
In the “Emera Energy Order,” FERC addressed Enforcement’s investigation of Emera Energy, which was initiated following a self-report submitted on November 21, 2016. Specifically, in November 2016, following a regular FERC compliance training session, an Emera Energy employee informed an in-house attorney about certain submissions of FPA Requests made by Emera Energy to the Internal Market Monitor (“IMM”) for its affiliate, Rumford Power Inc., the operator of a 265 MW combined natural gas-fired power plant interconnected exclusively with the Portland Natural Gas Transmission System (“PNGTS”). Following a review of its records and the FPA Requests in question, Emera Energy submitted a self-report to enforcement indicating that its power desk had submitted sixteen FPA Requests for Rumford from August 2015 through November 2016 with an ICE screenshot displaying an offer to sell natural gas posted by its gas desk.
Pursuant to the ISO-NE Tariff, market participants can make an FPA Request “whenever the Market Participant’s expected price to procure fuel… will be greater than that used by the Internal Market Monitor in calculating the Reference Levels for the Supply Offer.” To comply, market participants must include one of three forms specifically enumerated in the Tariff: (i) an invoice or purchase confirmation; (ii) a quote from a named supplier; or (iii) a price from a publicly available trading platform. To substantiate its Rumford-related FPA Requests, Emera Energy relied primarily on screenshots of prices the Intercontinental Exchange (“ICE”).
PNGTS is an illiquid trading point and, as a result, there are sometimes no offers to sell gas posted to ICE for that location. Emera Energy was therefore occasionally unable to provide a price from a publicly-available trading platform supporting its belief that the cost of natural gas for Rumford would be higher than the gas price used by the IMM for its Reference Level. In such instances, Emera Energy’s power desk personnel, responsible for submitting FPA Requests, asked gas desk personnel post to ICE an offer to sell natural gas at PNGTS. This was done to provide the type of documentation and analysis that Emera Energy could then submit to the IMM as part of an FPA Request.
After Emera Energy’s in-house counsel was made aware of the issue and following internal review, Emera Energy provided notice to FERC Enforcement and the IMM. While the internal review was ongoing, Emera Energy also ceased all activity relating to the practice described above. Enforcement determined Emera Energy violated FERC’s regulations and the ISO-NE Tariff because the evidence supporting the subject FPA Requests did not reflect an arm’s length transaction. In accepting the Agreement and consistent with its prior precedent, FERC explained that “affiliated entities are incapable of engaging in ‘arm’s length transactions’ because there is insufficient assurance that an agreed upon price will genuinely reflect market forces” and that, as such, the gas desk’s indirect quote to the power desk did not reflect an arm’s length transaction.
FERC directed Emera Energy to pay a civil penalty of $5,000 and a disgorge $14,120, plus $2,002.19 in interest. FERC cautioned that the penalty could have been significantly higher without its timely self-report and cooperation with Enforcement’s investigation.
In the Exelon Order, FERC addressed Enforcement determination that Exelon violated FERC’s regulations and ISO-NE’s Tariff with respect to Mystic 7’s fuel use. Specifically, Exelon owns and operates Mystic 7, which is a dual fuel steam turbine located outside of Boston, MA. Mystic 7 can operate on either natural gas or fuel oil, but, importantly, requires a blend of both gas and oil to start up.
Mystic 7 is a capacity resource in ISO-NE and, as such, has a daily must offer obligation. Pursuant to the Tariff, as part of its daily offer, Mystic 7 must submit the type and quantity of fuel required to start the plant. Beginning in December 2014, Mystic 7’s supply offers incorrectly indicated that it used exclusively oil to start, even though the unit actually required both gas an oil to start. Because its offers indicated that it relied solely on oil to start, Mystic 7 was often uneconomic and generally only dispatched for reliability reasons. This caused Mystic 7 to be overcompensated by ISO-NE, since ISO-NE compensated it based on, among other things, the erroneous cost of start-up fuel.
In August 2016, ISO-NE’s IMM initiated an investigation into Mystic 7’s fuel use and referred the issue to Enforcement. Following the initiation of the IMM’s investigation, Exelon took steps to correct the issue and resolved it to ISO-NE’s satisfaction in May 2019. Exelon also “voluntarily adopted substantial new internal controls and compliance measures to ensure the problem does not reoccur at Mystic 7 or any of the other generators in the company’s fleet.”
FERC directed Exelon to pay a civil penalty of $32,500 and disgorge $101,756, plus $15,324.45 in interest.
Click here to the Emera Energy Order.
Click here to read the Exelon Order