Chairman James Danly Dissent Regarding NRG Power Marketing LLC

Chairman James Danly Statement
January 08, 2021
Docket No. IN20-4-000

I dissent from the order in this case (Order) approving the Stipulation and Consent Agreement (Settlement Agreement) between the Office of Enforcement (Enforcement) and NRG Power Marketing LLC (NRG).  The Order approves the imposition of a penalty against NRG for submitting an aggressive bid reflecting a different expectation from that of the ISO-NE Internal Market Monitor (IMM) and Enforcement as to whether the ISO-NE market would be at equilibrium four years later.   

In my view, we should not penalize companies based on our disagreement with forecasts of future events submitted for independent review in a tariff-prescribed bid review process, even if we think that a company’s forecast is overly aggressive.  Instead, the proper remedy in such a case is to require the use of a different forecast that is more reasonable.  This is the Commission’s standard practice when reviewing applications under all the regimes we oversee and, in fact, that is what the IMM did here.  Once the IMM substituted its forecast for the one submitted by NRG, that should have been the end of the matter.  Instead of penalizing NRG, Enforcement’s investigation should be terminated. 

The Order also imposes a penalty for NRG’s failure to fill out the mothball cost section of the required workbook submission supporting NRG’s static de-list bids consistently with NRG’s statement in the static de-list bids regarding whether the units would remain active if they failed to receive a capacity award.  Again, a penalty is not the proper remedy for such a failure.  Instead, under the tariff-prescribed bid review process and the Commission’s standard practice, when incomplete or inconsistent information is submitted in an application, the proper response is to require appropriate information to be supplied.  The IMM had ample opportunity to request that NRG provide additional information regarding mothball costs, but never did so.  Nor did the IMM refer to NRG’s failure to supply consistent information regarding mothball costs when the IMM referred this matter to Enforcement.  I cannot support imposing a penalty for failure to provide information that the IMM could have requested in the course of a months-long, tariff-prescribed, iterative process but, by its inaction, indicated was immaterial.

I recognize that NRG has executed the Settlement Agreement and agreed to pay a penalty.  But NRG adamantly denied wrongdoing in the course of the investigation and admits to no violation in the Settlement Agreement.  Clearly, NRG chose the lesser of two evils: it agreed to pay a civil penalty of $85,000 in order to extinguish Enforcement’s claim, thereby avoiding further litigation expense.  I perfectly understand NRG’s decision.  However, I strongly disagree with any suggestion in the Commission’s order that NRG’s agreement to settle demonstrates that the settlement is fair, equitable, and in the public interest.[1]  An agreement requiring the subject of an investigation to pay a penalty for violating a tariff provision cannot be fair, equitable, or in the public interest when the subject did not violate the tariff.  It is the moral equivalent of accepting a guilty plea from a criminal defendant the prosecutor knows to be innocent.  We should not approve this agreement.  The Commission should instead terminate Enforcement’s investigation and take no further action.

ISO-NE’s FORWARD CAPACITY AUCTION AND STATIC DE-LIST BID REVIEW PROCESS

As explained in more detail in the Order, participants in ISO-NE’s annual Forward Capacity Auction (FCA) who have a capacity supply obligation and wish to remove a resource from the FCA for a single year may submit a static de-list bid during the qualification period.[2]  The purpose of this type of bid is to allow the owner of a generation resource to withdraw that resource from the auction if the auction price is below the costs of its resource for the auction year, permitting the resource to avoid the obligation to sell power at a loss. 

Static de-list bids for pivotal suppliers must be cost justified in order to prevent a supplier from submitting above-cost bids and thereby engaging in economic withholding.  However, a cost-justified static de-list bid is not required in order for the owner of a resource to withdraw from the auction at a price below the Dynamic De-List Bid Threshold,[3] which was $5.50/kW-month for the relevant auction.

Under the Tariff-prescribed process, the IMM reviews all static de-list bids and cost data submitted by auction participants over a four-month period to determine whether the submitted bid price represents the expected capacity costs for the resource.[4]  If, based on its review of a static de-list bid, the IMM determines that the bid is inconsistent with the resource’s net going forward costs, reasonable expectations about the resource’s Capacity Performance Payments, reasonable risk premium assumptions, and reasonable opportunity costs, the IMM will develop a revised bid based on IMM-determined values. 

Auction participants submitting a static de-list bid must “provide documentation separately detailing the expected Capacity Performance Payments for the resource.”[5]  The Tariff requires that “[t]his documentation must include expectations regarding the applicable Capacity Balancing Ratio, the number of hours of reserve deficiency [i.e., scarcity hours], and the resource’s performance during reserve deficiencies.”[6]  The Tariff further requires that “[s]ufficient documentation and information about each bid component must be included in the . . . Existing Capacity Qualification Package to allow the Internal Market Monitor to make the requisite determinations.”[7]

Although the Order admirably recites these Tariff requirements, conspicuously absent from the Order is any discussion of another requirement established by the Tariff: an iterative, months-long consultation process between the auction participant submitting a de-list bid and the IMM.  The Tariff provides that the IMM “shall review Static De-List Bids . . . and, after due consideration and consultation with the Lead Market Participant, as appropriate, shall develop an Internal Market Monitor-accepted Static De-List Bid.”[8]  As IMM witnesses described the iterative process in testimony submitted to the Commission:

Over the four month period between June and September, the IMM consults with each Market Participant about its Static De-List Bid submission.  The IMM routinely asks clarifying questions about the information in the participant’s submittal.  It is not uncommon for the IMM to spend hours with a Market Participant, on the phone or in person, discussing its submitted data so the IMM can fully understand the Market Participant’s expectations about net going forward costs, resource performance and risks.[9]

If the consultation results in an IMM-revised bid, then the revised bid can either be accepted by the participant and used in the auction, or the participant can reduce its bid below the Dynamic De-List Bid Threshold, or withdraw its bid altogether.[10]  Thus, at the end of the iterative evaluation process, an auction participant that initially submitted a static de-list bid will either participate in the auction with a bid at or below the price reviewed and approved by the IMM or will not have a static de-list bid in the auction.

The Order also fails to explain that, shortly before NRG submitted the static de-list bids at issue here, the IMM unsuccessfully attempted to modify the static de-list bid review process.  ISO-NE and New England Power Pool (Filing Parties) collectively submitted a filing, supported by testimony from the IMM, proposing to limit the flexibility of market participants to submit and then revise their static de-list bids.  The Filing Parties asserted that the IMM’s experience was that “the post-review modification process gives capacity suppliers the incentive to submit initial de-list bids in excess of their expected going-forward costs and allows capacity suppliers to use the IMM review process to explore whether the IMM will allow de-list bids at prices that substantially exceed their costs.”[11] 

The Commission rejected this proposal.  We stated that we recognized the IMM’s concern “about capacity suppliers using the Static De-List Bid review process as a price exploration exercise to ascertain whether the IMM may allow inflated bids.”[12]  However we were “not convinced that the concerns the Filing Parties and the IMM raise warrant the changes proposed to the Static De-List Bid rules.”[13]  Instead of revising the process, we required ISO-NE to retain the existing flexibility in its Tariff that allows auction participants to submit initial static de-list bids at higher prices than those ultimately approved by the IMM.

NRG’s STATIC DE-LIST BIDS AT ISSUE IN THIS PROCEEDING

The Settlement Agreement approved in our Order addresses NRG’s June 2016 submission of static de-list bids for the Middletown and Montville generating facilities during the FCA 11 qualification period.  This period applied to deliveries commencing four years later, on June 1, 2020.  Under the Tariff, if the auction price dropped below NRG’s submitted bid price, and if NRG’s bid was approved by the IMM, NRG would be permitted to remove the Middletown and Montville facilities from the auction and would not be obligated to offer them into the ISO-NE energy market for the period June 1, 2020 to May 31, 2021.

The element of NRG’s static de-list bids central to this proceeding was the expected scarcity hours, i.e., the number of hours in which ISO-NE would experience a reserve deficiency, four years in the future.  The greater number of scarcity hours, the more likely NRG would be to incur a penalty under ISO-NE’s Capacity Performance Payment regime, and the higher NRG’s going forward costs.  NRG’s bid was based on its forecast number of scarcity hours.  This was ISO-NE’s own estimate of scarcity hours in the event the ISO-NE market was in equilibrium (i.e., with no excess capacity) during the delivery period four years in the future.

As required by the Tariff, NRG submitted workbooks providing data supporting its bids.  Included with its submission was NRG’s required rationale for using its expected number of scarcity hours. 

In response to the IMM’s questions during the Tariff-prescribed consultation process, NRG further explained (on July 9, 2016) the bases for its static de-list bid submissions, including the Scarcity Hour Value.  In its response, NRG relied on public ISO-NE data, particularly with respect to historic static de-list bids and potential future bids given significant market changes.

In response to further IMM questions later in the iterative process, NRG provided further support (on August 31, 2016) for its Scarcity Hour Value.

Although ISO-NE projected the same Scarcity Hour Value as NRG if the market were to be in equilibrium four years in the future, the IMM projected that the market would not be in equilibrium but would have significant excess supply.  Based on this forecast of excess supply four years in the future, the IMM reduced the scarcity hours assumption underlying NRG’s static de-list bid. 

In addition to requiring a projection of expected scarcity hours, the IMM workbook also had a section where auction participants submitting de-list bids were to input the costs of mothballing their resources if the owner withdrew its resource from the auction and indicated that the resource would be retired upon such withdrawal.  These costs would not be incurred if the resource remained in the auction and received a capacity award, and thus were required to be subtracted from the calculation of going forward costs as representing a cost-savings resulting from receiving a capacity award in the auction.

NRG’s treatment of mothball costs in its workbook was inconsistent with NRG’s statement in the static de-list bids as to whether the units would remain active if they did not receive a capacity supply obligation.  However, the IMM—in the course of the extensive back-and-forth in which it scrutinized the components of NRG’s bid—never mentioned this inconsistency.  Further, the IMM declined to treat mothball costs differently in its revision of NRG’s static de-list bid.  As I explain below, the IMM’s failure to treat mothball costs differently in its revision, while not dispositive, casts serious doubt on the materiality of the inconsistency in NRG’s submission.

When the IMM revised NRG’s cost calculation, it reduced NRG’s bid to $5.50/kW-month, which was the Dynamic De-List Bid Threshold at or below which no cost justification is required to remove a resource from the auction.  NRG then withdrew its static de-list bids.  The ultimate outcome of the consultation process?  The IMM effectively rejected NRG’s static de-list bids.

After NRG withdrew its bids at the conclusion of the tariff-prescribed review process, the IMM referred the matter to the Commission for two possible violations: (1) the IMM alleged that NRG may have misrepresented its resources’ costs by submitting misleading de-list bid information, in violation of the Commission’s rule against submitting false or misleading information, or omitting material information, in communications with the ISO; and (2) the IMM alleged that NRG may have misrepresented its costs to position itself to be able to strategically manipulate the outcome of the 2017 Forward Capacity Auction (FCA 11), in violation of the Commission’s market manipulation rule.  The referral relied on NRG’s forecast number of scarcity hours for each of these claims.  The IMM did not allege that NRG violated the Tariff.[14]  Nor did the IMM mention NRG’s treatment of mothball costs.

NRG SHOULD NOT BE PENALIZED

As an initial matter, I agree that the IMM’s referral merited an inquiry by Enforcement.  But that is because the IMM alleged that NRG engaged in market manipulation which, on its face, warranted a closer look.  However, the market manipulation allegation appears to have no merit, since it is not even mentioned in our order or in the stipulation between Enforcement and NRG.  In my view, once Enforcement determined that the IMM’s market manipulation allegations were unfounded, the investigation should have been terminated.

Enforcement alleges that NRG has committed two violations that support the imposition of a penalty: (1) that NRG’s static de-list bids violated section III.13 of the Tariff; and (2) that NRG violated section 35.41(b) of the Commission’s regulations[15] by transmitting inaccuracies concerning the resources’ costs in its static de-list bid submissions and subsequent communications with the IMM.  In my view, penalties are not warranted on either basis.

NRG’s Scarcity Hour Value Used to Develop its Bids Did Not Violate the Tariff or Section 35.41(b) of the Commission’s Regulations

NRG complied with the Tariff when it used its expected number of scarcity hours to support its static de-list bids.  NRG complied with the Tariff requirement that scarcity hours be used in the calculation and, as also required, NRG provided a rationale for its use of this number.  NRG also complied with the Tariff’s requirement to engage with the IMM in its review and NRG provided further explanation and information when the IMM so requested.

Enforcement’s Tariff violation allegation does not appear to be that NRG failed to take any step required by the Tariff.[16]  Rather, Enforcement points to that part of the Tariff requiring that static de-list bids “must include expectations regarding . . . the number of hours of reserve deficiency [i.e., scarcity hours].”[17]  Enforcement asserts that NRG violated this requirement because NRG did not “expect” there to be its submitted number of scarcity hours four years in the future.  This alleged misstatement regarding NRG’s expectation of scarcity hours also forms the basis for Enforcement’s allegation that NRG violated section 35.41(b) of the Commission’s regulations.

It is problematic, to say the least, for Enforcement to seek penalties in a case that hinges on freighting the term “expectations” with such meaning.  Such a determination necessarily assumes that NRG had one objectively verifiable “expectation” of scarcity hours that was misstated in the static de-list bids. 

NRG’s original June 6, 2016 bid justification explained its rationale for its Scarcity Hour Value, which it based on ISO-NE’s projection.  NRG listed what it considered to be the justification for its forecast that the market would be at equilibrium.  This turned out to be a higher number of scarcity hours than, perhaps the IMM “expected,” but it was not so high that we can conclude it was objectively higher than NRG ever could have expected.

Enforcement’s claim that NRG did not “expect” its submitted number of scarcity hours is based on Enforcement’s observation (as reflected in the statement in the Settlement Agreement) that “NRG used a specified value of scarcity hours . . . that differed from forecasts used for other purposes within NRG at various points in time.”[18]  The question thus is whether NRG could have “expected” equilibrium conditions notwithstanding contrary internal forecasts.

I am aware of no law that demands a company have only one “expectation.”  Indeed, it would be surprising if there were—companies like NRG employ many people, and these employees probably have differing expectations about virtually every subject they consider.  The “expectation” of a company, if one were forced to identify such a thing, is most fairly the one that the company declares in some formal proceeding or forum, after the various employees make recommendations, discuss their thoughts and, after those thoughts are taken into consideration, the management of the company directs an official pronouncement.  I note that this is much the same principle we apply to the Commission.  Our position on an issue is the position expressed in orders approved by a majority vote of the sitting Commissioners, regardless of how vigorous an internal debate may have preceded the order’s approval.  In this case, the pronouncement of NRG’s expectation came when NRG submitted the support for its static de-list bid to the IMM.  Contrary forecasts within an organization, especially within different groups of an organization as was the case here, are not abnormal.  NRG should not be penalized simply because internal NRG forecasts predicted a lower number of scarcity hours than were ultimately included in NRG’s static de-list bid.

Even if one were to concede that it was possible to identify an “expectation” held by a company, it is hard to see how a market participant could have so much confidence in any prediction regarding market conditions four years hence that it could be described as the expectation.[19]  Particularly in this case.  Remember the prevailing conditions within ISO-NE when NRG’s bids were submitted in 2016.  There was a new market design with a new demand curve likely to reduce prices.  There was pent up “demand” for static de-list bids, with the largest resource in New England (Mystic 8 & 9) publicly threatening to retire.  And, aside from ISO-NE specific considerations, there were any number of other possible unthought-of eventualities facing the market including, strictly by way of hypothesis, an unforeseeable global pandemic.

Imposing a penalty for forecasting a number of scarcity hours with which the IMM disagreed is particularly troubling here.  As I noted above, shortly before NRG’s bids were submitted, we issued an order rejecting Tariff amendments designed to change the static de-list bid process, notwithstanding the IMM’s assertion that “the post-review modification process gives capacity suppliers the incentive to submit initial de-list bids in excess of their expected going-forward costs and allows capacity suppliers to use the IMM review process to explore whether the IMM will allow de-list bids at prices that substantially exceed their costs.”[20]  We cannot penalize NRG for violating the ISO-NE Tariff when we expressly acknowledged that the conduct referred by the IMM and complained of by Enforcement is authorized by that Tariff.

Finally, I pause to note that, in developing its updated net CONE projection filed on December 31, 2020, ISO-NE projected long-term capacity equilibrium conditions[21] even though ISO-NE currently has a capacity surplus.  The net Cone projection represents an important input into ISO-NE’s capacity auction.  We cannot credibly penalize NRG for employing the same projection in its static de-list bid.

NRG’s Treatment of Mothball Costs in Developing its Bids Does Not Constitute a Violation of Section 35.41(b) of the Commission’s Regulations and Does Not Otherwise Warrant a Penalty

I do not believe that NRG’s submission of inconsistent assumptions regarding mothball costs in this case constitutes a violation of the section 35.41(b) requirement that a seller not submit false or misleading information or omit material information.  In order for this inconsistent treatment to serve as the basis of a penalty, it must be material.

In this case, NRG’s treatment of mothball costs is not material.  The Tariff anticipates that the IMM will raise issues such as these during the prescribed review process.  Here, the IMM never once mentioned that NRG’s treatment of mothball costs in its bids was incorrect, nor did the IMM mention the mothball cost treatment in its referral.  Moreover, the IMM did not, in its reformation of NRG’s bid revise NRG’s mothball costs.  These facts very strongly suggest that the omission was not material. 

Moreover, the IMM’s revision of NRG’s scarcity hours submission by itself brought its static de-list bid to the $5.50 Dynamic De-List Bid Threshold under which no further justification for submitting a de-list bid is required.  Once that figure was revised, no further inquiry into the contents of the de-list bid was necessary.  The mothball costs, if treated differently, could not have raised the de-list bid price, so its value was immaterial.  This cannot serve as the basis for a penalty.

Finally, in assessing each of Enforcement’s allegations, the Commission should bear in mind its typical practice when in receipt of incomplete applications or applications containing incorrect or inconsistent information.  The filing of such an application in any of the regimes we administer is not treated as the predicate for an action by Enforcement.  Instead, we either reject the application as incomplete or require additional submissions to provide the missing or incorrect information.

For example, under Part 35 of our regulations, applicable to cost-based rates, public utilities are required to provide detailed cost and revenue information as to past periods, and forecasts of the same costs and revenues for the 12 months following the proposed effective date of the rate increase.[22]  The information supplied must be accompanied by an attestation from an officer of the applicant that the submissions “are true, accurate, and current representations of the utility's books, budgets, or other corporate documents.”[23]

Notwithstanding this requirement in our regulations, we do not penalize applicants for basing rate filings on statements that are demonstrably incorrect.  For example, when evaluating the proposed cost-based reliability must-run agreement filed by Mystic Development, LLC (Mystic), we observed that the proposed fuel index in that agreement overstated Mystic’s cost of fuel in a way that was inconsistent with Mystic’s fuel supply agreement.  Rather than penalize Mystic for violating our regulations or for making a misstatement, we simply required that the fuel index be revised to correctly reflect Mystic’s cost of fuel.[24] 

In my view, fairness would demand that—in all but the most egregious cases—we decline to impose penalties for less-than-perfect submissions to the IMM or the Commission when there is opportunity for review and revision.  To do otherwise is to apply our enforcement authority erratically and unevenly, requesting further submission from some utilities while subjecting some unfortunates to the burdens of investigation and civil penalties.

 

For these reasons, I respectfully dissent.

 

 

________________________

James P. Danly

Chairman