Commissioner James Danly Statement
November 18, 2021
Docket No. IN21-9-000
This case represents another instance of the Commission penalizing a market participant for doing nothing more than attempting to maximize its revenues in conformity with the provisions of the tariff under which it operates. But this case is unlike earlier cases—like the Up-to-Congestion (UTC) cases—where, arguably, the conduct at issue had no independent economic substance and provided no market benefit. Here, Golden Spread Electric Cooperative, Inc. (Golden Spread) responded to the incentives established by Southwest Power Pool’s (SPP) open access transmission tariff (Tariff) in the very manner in which SPP intended, and in so doing provided the exact benefit to the market that SPP stated the Tariff was designed to achieve. Because Golden Spread acted within both the spirit and the letter of the Tariff, it could not have committed market manipulation. I therefore dissent in full.
I recognize that Golden Spread executed the Stipulation and Consent Agreement (Settlement Agreement) now before us and that it agreed to pay a penalty. Ordinarily, I hesitate to intervene when parties come to a settlement. But this is not a typical settlement. It is a settlement in an enforcement case. Throughout the investigation, Golden Spread adamantly denied any wrongdoing and does not now admit to any violation. It is apparent that Golden Spread has made a clear-eyed, economically-rational decision to choose the lesser of two evils: extinguish the Office of Enforcement’s claim by agreeing to pay a civil penalty instead of further litigating this case at a cost that would greatly exceed the cost of settlement. Although I perfectly understand Golden Spread’s decision, its agreement is not an admission of guilt, and our duty as a Commission requires us to scrutinize this voluntary agreement. Because Enforcement Staff’s allegations have no validity, what the Commission should have done here is reject the settlement, order Enforcement Staff’s investigation terminated, and take no further action.
I strongly believe the Commission should have a robust enforcement program, and I have voted for a number of orders penalizing entities that have engaged in manipulation or have intentionally violated our orders. But having a robust enforcement program does not mean blindly accepting Enforcement Staff’s allegations without carefully evaluating their merit, even when the matter before us is the approval of a settlement agreement and not a Commission order adjudicating liability.
Background
As explained in the Commission’s order approving the settlement, two types of commitment status are relevant here: (1) self-commit, and (2) market.[1] When the owner of a generation facility wants its unit to operate outside of SPP’s control, it can offer its unit in self-commit status. When a unit is offered in self-commit status, SPP is obligated to commit the unit, regardless of SPP’s evaluation of market conditions or the most efficient commitment for the region as a whole. When the owner offers its unit in market status, the owner transfers control of the commitment of the unit to SPP, which then has the option to commit the unit as it deems appropriate based on market conditions.
Not surprisingly, SPP prefers for units to be offered in market status. To create an incentive for generation owners to offer in market status, SPP filed (and the Commission approved) tariff provisions providing for make-whole payments to generation owners in order to protect them from incurring losses when SPP controls their commitment. SPP stated that the payments are intended to make resource owners economically “indifferent to SPP’s commitment decisions,”[2] so that SPP can optimize unit commitment decisions for the entire market, without being constrained by market participants’ self-commitment based solely on their own economics.[3]
Under these tariff provisions, SPP calculates potential make-whole payments for each “commitment period” in which a resource is offered in market status.[4] A commitment period is the continuous period of time between a resource’s commit time and de-commit time—e.g., the period of time between when a resource is committed and either is decommitted or no longer is offered in market status.[5] SPP does not determine a resource’s make-whole payments separately for each hour of a commitment period. Instead, SPP nets the payments needed to make the resource whole in those hours during the commitment period when the resource operates at a loss from the profits earned in the hours in the commitment period when the resource’s market revenues exceed its costs.[6] Only if the resource operates at a net loss for the entire commitment period does it receive a make-whole payment equal to that net loss.
For purposes of this case, it must be borne in mind that the Tariff allows market participants to establish the length of the commitment period used to determine make-whole payments by switching from market to self-commit status in a single day.[7] It is entirely acceptable under the Tariff for a resource owner to offer in self-commit status for some hours in a day and in market status for other hours in the same day. The Tariff also permits switching back and forth repeatedly in the course of a day (something Golden Spread did not do).
This case involves Golden Spread’s strategy intended to maximize the revenues it earned from its Mustang Station, consistent with the make-whole provisions of the Tariff. Prior to the period that was the subject of Enforcement Staff’s investigation (Relevant Period), Golden Spread typically offered Mustang Station in self-commit status 24 hours a day. During this time, SPP had no control over the commitment of Mustang Station and was obligated to honor Mustang Station’s self-commitment every hour it was offered, but SPP was not required to award Mustang Station any make-whole payments. As a result, Golden Spread lost money in the low-load periods when its costs were higher than its market revenues.
Under the new strategy that earned Golden Spread the attention of Enforcement Staff, it stopped submitting self-commit offers during the low-load hours (typically the first few hours of the day) when its costs typically exceeded market revenues and it previously lost money in its operations. Instead, Golden Spread submitted market offers for those hours and was entitled to make-whole payments when Mustang Station was committed by SPP and otherwise would have operated at a loss. The submission of market offers for these hours made Golden Spread economically indifferent to SPP’s commitment decisions and gave SPP control over the commitment of Mustang Station, just as SPP intended.
After offering Mustang Station in market status for the early morning hours, Golden Spread typically offered Mustang Station in self-commit status for the remainder of the day, which included higher-load hours when Golden Spread expected Mustang Station to be profitable. SPP does not include hours when a unit is offered in self-commit status as part of the commitment period used to calculate make-whole payments, so the profits Golden Spread earned when it offered Mustang Station in this status were not used to offset the make-whole payments Golden Spread received when Mustang Station was offered in market status and operated at a loss. This switch between market status and self-commit status was expressly permitted by the Tariff, and at no time did SPP object to Golden Spread’s use of a commitment period of less than one day.
Golden Spread’s offer strategy gave SPP control over the commitment of Mustang Station when it was offered in market status, and thereby provided the market benefits SPP stated it wanted when it established the make-whole payment program. Although SPP frequently committed Mustang Station in those hours, there were a number of days during the Relevant Period when Mustang Station was offered in market status but was not committed by SPP. This meant that SPP was able to optimize unit commitments for the market in those hours by not committing Mustang Station, something SPP would have been unable to do if Golden Spread had continued to offer Mustang Station in self-commit status. SPP instead would have been obligated to accept Mustang Station’s self-commitment and that presumably would have prevented SPP from committing a different resource in such a way as to optimize generation commitment throughout the whole of SPP’s market.
Enforcement Staff’s Allegations
The gravamen of Enforcement Staff’s claim is that Golden Spread attempted to maximize its revenues in a manner that Enforcement Staff apparently finds to be objectionable. But asserting that Golden Spread employed a strategy to maximize the revenues it earned in SPP’s market is not sufficient to demonstrate a violation of the Anti-Manipulation provisions of Federal Power Act (FPA) section 222[8] and the Commission’s regulations.[9] Instead, Enforcement Staff must demonstrate that Golden Spread’s strategy was in some way manipulative or fraudulent. None of Enforcement Staff’s theories even remotely satisfy this burden.
Enforcement Staff’s first theory is that Golden Spread’s “strategy signaled to the market that Golden Spread was trading at Mustang Station based on market fundamentals when, in fact, Enforcement found that it was trading for the improper purpose of targeting and maximizing make whole payments.”[10] This circular argument does not demonstrate fraud or manipulation, because it depends entirely on Enforcement Staff’s assumption that the trading was fraudulent and manipulative. If the trading was not for an “improper purpose”—and there is no evidence that it was—the trading could not have deceived the market.
Further, Enforcement Staff’s contention that the market was deceived because Golden Spread’s trades were not based on market fundamentals is, itself, false. Golden Spread’s strategy was based entirely on market fundamentals. Golden Spread offered Mustang Station in market status during low-load hours when prices were likely to be low, so that it would not be committed when prices were below Mustang Station’s marginal costs. That is the very definition of an offer based on market fundamentals. Golden Spread’s switch to self-commit status when it expected market prices to be high is likewise an action based on market fundamentals because Golden Spread offered in self-commit status when it expected such an offer to be profitable. Staff does not—and could not—allege that Golden Spread’s switch from market to self-commit status had any effect on any market price. Golden Spread’s offers were economically rational and based on market fundamentals, and as a result no false signals could have been sent to the market.[11]
Enforcement Staff’s second theory is that Golden Spread’s “strategy at issue here of switching commitment statuses intraday in order to target make whole payments and receive compensation from SPP on an hourly basis, was inconsistent with, and violative of, SPP’s make whole payment construct, which is designed to compensate units on an eligibility period basis.”[12] Whatever merit there might be to a claim that it would be improper to switch between market and self-commit status on an hourly basis, this theory misstates how Golden Spread offered the Mustang Station into the market. Golden Spread did not switch its offers on an hourly basis in order to target make-whole payments. Instead, Golden Spread offered Mustang Station in market status for several consecutive hours in the early morning, and then almost always in self-commit status the rest of the day.[13] Thus, Golden Spread’s make-whole payments were determined on an “eligibility period” of multiple consecutive hours. As Enforcement Staff admits, this is what the Tariff contemplates.[14]
Enforcement Staff’s third and final theory is that “Golden Spread caused SPP to issue make whole payments that Mustang Station would not otherwise have received had SPP assessed the full economics of the unit’s daily operations.”[15] In other words, Golden Spread would not have received the same amount of money from make-whole payments if SPP had evaluated the unit’s economics by netting its losses and revenues on a daily basis. True, but completely beside the point. The Tariff does not require make-whole payments to be calculated on the basis of a unit’s daily operations. Instead, the Tariff provides that the make-whole payments are calculated on the basis of a commitment period that can be less than a full day. The Tariff also specifically provides that the length of a commitment period is determined entirely by the owner of the unit at its sole discretion. That the calculation of make-whole payments made over an entire day is different from the calculation of make-whole payments over a multi-hour commitment period of less than a day is an artifact of the mechanics of the Tariff, and simply cannot serve as the basis of a manipulation claim.
For some reason, Enforcement Staff has come up with the idea that Golden Spread’s strategy was contrary to SPP’s intent when it established the make-whole payment mechanism in the Tariff.[16] However, record evidence demonstrates that SPP established the make-whole payment provisions in order to ensure that generation owners would be economically indifferent to SPP’s commitment decisions. And that is what happened here. When Golden Spread offered the Mustang Station in market status, it gave SPP control over its commitment allowing SPP to optimize generation commitment across its footprint. And the make-whole payments caused Golden Spread to be economically indifferent as to whether its unit was committed.
The entire structure of SPP’s tariff suggests that SPP would find Golden Spread’s offer strategy to be wholly legitimate. It is allowed by the plain terms of the Tariff and nothing in the Tariff would indicate that it was disallowed. Were it otherwise, the Tariff would have required a daily market status offer to qualify for make-whole payments and would not have permitted generation owners to switch between market and self-commit status at any time, at their discretion. There is no such requirement, and SPP has not filed to change its Tariff.
I think it is important at this point to pause and offer an observation regarding the significant difference between the case before us and other enforcement cases in which the Commission has imposed penalties on market participants even though their actions were consistent with the relevant tariff provisions:
City Power.[17] In this case, City Power entered into three types of UTC trades: (1) “‘round-trip’ trades that canceled each other out by placing the first leg of the trade from locations A to B, and simultaneously placing a second leg of equal volume from locations B to A”; (2) “trades between two PJM nodes . . . that are import and export pricing points of the same PJM interface designed to have equivalent prices”; and (3) “trades between two PJM nodes . . . that historically had a very small price spread and in most hours failed to generate spreads greater than the transaction costs associated with the trades.”[18] Because these trades essentially cancelled each other out, they appeared to have no economic substance and appeared to be executed solely to generate marginal loss payments.[19] The Commission found that these trades provided no benefits to the PJM market and therefore were manipulative.[20]
Other UTC Cases. Other UTC cases in which the Commission imposed penalties have essentially the same facts; offsetting trades with apparently no economic substance engaged in to collect marginal loss payments while providing no economic benefits to the PJM market.[21]
Paper Mill Demand Reduction Cases. In these cases, certain paper mills were found to have artificially altered their baseline consumption when qualifying as demand resources. By so doing, they were paid for capacity benefits that in fact they were not providing.[22]
In each of the above cases, the central reason for the Commission’s finding was that, although the manipulative conduct was arguably not prohibited by the relevant tariff, the conduct had no real substance (for example the UTC trades that cancelled each other out) and provided no economic benefit to the market. This case is completely different. Here, Golden Spread’s market offers provided the benefit contemplated by the Tariff—the commitment of Mustang Station being placed under SPP’s control—which Golden Spread agreed to do because the make-whole payments made it indifferent to whether the unit was committed. This provided obvious benefit to the market, indeed the very benefit that make-whole payments were designed to achieve: the optimized commitment of generation across SPP’s territory.
Today’s case represents a significant and unjustifiable expansion of our earlier precedent. In the past, while we applied a somewhat vague and subjective standard, it was at least possible to come away with some intuitive understanding of what types of conduct Enforcement Staff would find improper and why.[23] In the cases cited above, for example, it is at least credible for the Commission to have found it improper to make trades with little or no economic substance that provide no benefit to the market simply for the purpose of obtaining a side-payment provided for by the market rules. In contrast, this is a case in which not only were the target’s actions not prohibited by the Tariff, they were based on market fundamentals and delivered the benefits to the market that the Tariff was designed to obtain, by the exact means established by the Tariff’s plain language.
Today’s order will leave market participants with no way of knowing whether economically substantive and rational profit-maximizing trades, made in conformity with applicable tariffs, will be found to be manipulative. Market participants making such trades can only hope that they do not catch Enforcement Staff’s attention. Enforcement Staff views all such trades through black-colored glasses and the Commission has demonstrated that it will not question Enforcement Staff’s claims of manipulation even when they are as obviously meritless as those before us today.
For these reasons, I respectfully dissent.
[1] Golden Spread Elec. Cooperative, Inc., 177 FERC ¶ 61,109, at P 5 (2021).
[2] Sw. Power Pool, Inc., 141 FERC ¶ 61,048, at P 134 (2012).
[3] See Sw. Power Pool, Inc., Docket No. ER12-1179-000, Submission of Tariff Revisions to Implement SPP Integrated Marketplace at 27 (Feb. 29, 2012).
[4] See Tariff, Attach. AE Integrated Marketplace, Section 8.5.9(1), Day-Ahead Make Whole Payment Amount (effective Mar. 1, 2015; superseded May 1, 2016, but the language remained unchanged); SPP Market Monitoring Unit, State of the Market 2016, at 7, https://www.spp.org/documents/53549/spp_mmu_asom_2016.pdf.
[5] Tariff, Attach. AE Integrated Marketplace, Section 1.1, Definitions R, Reliability Unit Commitment Period (effective Mar. 1, 2015; superseded Sept. 23, 2015, but the language remained unchanged). A commitment period may extend across multiple days.
[6] See Tariff, Attach. AE Integrated Marketplace, Section 8.5.9(1), Day-Ahead Make Whole Payment Amount.
[7] See Tariff, Attach. AE Integrated Marketplace, Section 4.1, Offer Submittal, subsection (4) (effective Mar. 1, 2015; superseded Sept. 23, 2015, but the language Remained unchanged) (“Offers may be submitted that vary for each hour of the Operating Day . . . .”).
[8] 16 U.S.C. § 824v.
[9] 18 C.F.R. § 1c.2.
[10] Settlement Agreement at P 14.
[11] Further, the provisions of SPP’s tariff permitting the establishment of a commitment period of less than a day were an integral part of the market, and Golden Spread’s strategy based on these provisions was a reaction to the “market fundamentals” created by these Tariff provisions.
[12] Settlement Agreement at P 15 (emphasis added).
[13] On a few occasions, Golden Spread also offered Mustang Station in market status for the last one or two hours of the day.
[14] Settlement Agreement at P 15 (“Enforcement also concluded that . . . offering a unit in both market status and self-commit status intraday does not, by itself violate SPP’s Integrated Marketplace Tariff . . . .”).
[15] Id. P 16 (emphasis added).
[16] It is, of course, completely irrelevant what SPP’s “intent” was, to the extent that there can be said to be such a thing. What matters is the Tariff. But since Enforcement Staff seems to rely on SPP’s intent to make out its claim against Golden Spread, the subject warrants discussion.
[17] City Power Mktg., LLC, 152 FERC ¶ 61,012 (2015) (City Power).
[18] Id. P 3.
[19] See id.
[20] See id. PP 5-6.
[21] See Houlian Chen, 151 FERC ¶ 61,179, at P 49 (2015); Coaltrain Energy, L.P., 155 FERC ¶ 61,204 (2016).
[22] Competitive Energy Servs., LLC, 144 FERC ¶ 61,163 (2013); Richard Silkman, 144 FERC ¶ 61,164 (2013); Lincoln Paper & Tissue, LLC, 144 FERC ¶ 61,162 (2013).
[23] I pause to note that I do not believe that an intuitive understanding of malefaction is sufficient, in itself, to make out a successful enforcement claim. I merely raise this point to highlight the Commission’s departure from its earlier cases. In many cases, the types of improper behavior that have been investigated by the Office of Enforcement at least have analogues under section 10(b) of the Securities Exchange Act, a basis for enforcement action specifically contemplated by the Energy Policy Act of 2005. See 16 U.S.C. § 824v(a).