[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
POWERING AMERICA: EXAMINING THE ROLE OF FINANCIAL TRADING IN THE
ELECTRICITY MARKETS
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ENERGY
OF THE
COMMITTEE ON ENERGY AND COMMERCE
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
NOVEMBER 29, 2017
__________
Serial No. 115-81
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Energy and Commerce
energycommerce.house.gov
_________
U.S. GOVERNMENT PUBLISHING OFFICE
28-604 PDF WASHINGTON : 2018
____________________________________________________________________
For sale by the Superintendent of Documents, U.S. Government Publishing Office,
Internet:bookstore.gpo.gov. Phone:toll free (866)512-1800;DC area (202)512-1800
Fax:(202) 512-2104 Mail:Stop IDCC,Washington,DC 20402-001
COMMITTEE ON ENERGY AND COMMERCE
GREG WALDEN, Oregon
Chairman
JOE BARTON, Texas FRANK PALLONE, Jr., New Jersey
Vice Chairman Ranking Member
FRED UPTON, Michigan BOBBY L. RUSH, Illinois
JOHN SHIMKUS, Illinois ANNA G. ESHOO, California
MICHAEL C. BURGESS, Texas ELIOT L. ENGEL, New York
MARSHA BLACKBURN, Tennessee GENE GREEN, Texas
STEVE SCALISE, Louisiana DIANA DeGETTE, Colorado
ROBERT E. LATTA, Ohio MICHAEL F. DOYLE, Pennsylvania
CATHY McMORRIS RODGERS, Washington JANICE D. SCHAKOWSKY, Illinois
GREGG HARPER, Mississippi G.K. BUTTERFIELD, North Carolina
LEONARD LANCE, New Jersey DORIS O. MATSUI, California
BRETT GUTHRIE, Kentucky KATHY CASTOR, Florida
PETE OLSON, Texas JOHN P. SARBANES, Maryland
DAVID B. McKINLEY, West Virginia JERRY McNERNEY, California
ADAM KINZINGER, Illinois PETER WELCH, Vermont
H. MORGAN GRIFFITH, Virginia BEN RAY LUJAN, New Mexico
GUS M. BILIRAKIS, Florida PAUL TONKO, New York
BILL JOHNSON, Ohio YVETTE D. CLARKE, New York
BILLY LONG, Missouri DAVID LOEBSACK, Iowa
LARRY BUCSHON, Indiana KURT SCHRADER, Oregon
BILL FLORES, Texas JOSEPH P. KENNEDY, III,
SUSAN W. BROOKS, Indiana Massachusetts
MARKWAYNE MULLIN, Oklahoma TONY CARDENAS, California
RICHARD HUDSON, North Carolina RAUL RUIZ, California
CHRIS COLLINS, New York SCOTT H. PETERS, California
KEVIN CRAMER, North Dakota DEBBIE DINGELL, Michigan
TIM WALBERG, Michigan
MIMI WALTERS, California
RYAN A. COSTELLO, Pennsylvania
EARL L. ``BUDDY'' CARTER, Georgia
JEFF DUNCAN, South Carolina
Subcommittee on Energy
FRED UPTON, Michigan
Chairman
PETE OLSON, Texas BOBBY L. RUSH, Illinois
Vice Chairman Ranking Member
JOE BARTON, Texas JERRY McNERNEY, California
JOHN SHIMKUS, Illinois SCOTT H. PETERS, California
ROBERT E. LATTA, Ohio GENE GREEN, Texas
GREGG HARPER, Mississippi MICHAEL F. DOYLE, Pennsylvania
DAVID B. McKINLEY, West Virginia KATHY CASTOR, Florida
ADAM KINZINGER, Illinois JOHN P. SARBANES, Maryland
H. MORGAN GRIFFITH, Virginia PETER WELCH, Vermont
BILL JOHNSON, Ohio PAUL TONKO, New York
BILLY LONG, Missouri DAVID LOEBSACK, Iowa
LARRY BUCSHON, Indiana KURT SCHRADER, Oregon
BILL FLORES, Texas JOSEPH P. KENNEDY, III,
MARKWAYNE MULLIN, Oklahoma Massachusetts
RICHARD HUDSON, North Carolina G.K. BUTTERFIELD, North Carolina
KEVIN CRAMER, North Dakota FRANK PALLONE, Jr., New Jersey (ex
TIM WALBERG, Michigan officio)
GREG WALDEN, Oregon (ex officio)
(ii)
C O N T E N T S
----------
Page
Hon. Fred Upton, a Representative in Congress from the State of
Michigan, opening statement.................................... 1
Prepared statement........................................... 2
Hon. Bobby L. Rush, a Representative in Congress from the State
of Illinois, opening statement................................. 3
Hon. Greg Walden, a Representative in Congress from the State of
Oregon, prepared statement..................................... 127
Hon. Frank Pallone, Jr., a Representative in Congress from the
State of New Jersey, prepared statement........................ 127
Witnesses
Wesley Allen, Chief Executive Officer, Red Wolf Energy Trading,
on Behalf of Financial Marketers Coalition..................... 5
Prepared statement........................................... 7
Answers to submitted questions............................... 131
Eric Hildebrandt, Ph.D., Director, Department of Market
Monitoring, California Independent System Operator Corporation. 23
Prepared statement........................................... 25
Answers to submitted questions............................... 145
Max J. Minzner, Partner, Jenner & Block, LLP..................... 57
Prepared statement........................................... 59
Answers to submitted questions............................... 161
Noha Sidhom, Chief Executive Officer, TPC Energy, LLC, on Behalf
of the Power Trading Institute................................. 66
Prepared statement........................................... 68
Answers to submitted questions............................... 165
Vincent P. Duane, Senior Vice President, Law, Compliance &
External Relations, PJM Interconnection, LLC................... 88
Prepared statement........................................... 90
Answers to submitted questions............................... 175
Christopher Moser, Senior Vice President for Operations, NRG
Energy, Inc.................................................... 97
Prepared statement........................................... 99
Answers to submitted questions............................... 183
Submitted Material
Letter of November 27, 2017, from Joseph Bowring, Independent
Market Monitor for PJM, to Mr. Upton and Mr. Rush, submitted by
Mr. Upton...................................................... 129
POWERING AMERICA: EXAMINING THE ROLE OF FINANCIAL TRADING IN THE
ELECTRICITY MARKETS
----------
WEDNESDAY, NOVEMBER 29, 2017
House of Representatives,
Subcommittee on Energy,
Committee on Energy and Commerce,
Washington, DC.
The subcommittee met, pursuant to call, at 10:17 a.m., in
room 2322, Rayburn House Office Building, Hon. Fred Upton
(chairman of the subcommittee) presiding.
Members present: Representatives Upton, Olson, Barton,
Shimkus, Harper, McKinley, Griffith, Johnson, Flores, Mullin,
Hudson, Walberg, Rush, McNerney, Peters, Green, Sarbanes,
Welch, Tonko, Loebsack, and Schrader.
Staff present: Samantha Bopp, Staff Assistant; Allie Bury,
Legislative Clerk, Energy/Environment; Zack Dareshori,
Legislative Clerk; Wyatt Ellertson, Professional Staff Member,
Energy/Environment; Jordan Haverly, Policy Coordinator,
Environment; A.T. Johnston, Senior Policy Advisor, Energy; Mary
Martin, Chief Counsel, Energy/Environment; Alex Miller, Video
Production Aide and Press Assistant; Brandon Mooney, Deputy
Chief Counsel, Energy; Mark Ratner, Policy Coordinator;
Annelise Rickert, Counsel, Energy; Dan Schneider, Press
Secretary; Peter Spencer, Senior Professional Staff Member,
Energy; Jason Stanek, Senior Counsel, Energy; Rick Kessler,
Minority Senior Advisor and Staff Director, Energy and
Environment; John Marshall, Minority Policy Coordinator; and
Alexander Ratner, Minority Policy Analyst.
OPENING STATEMENT OF HON. FRED UPTON, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF MICHIGAN
Mr. Upton. Good morning, everybody. So, at our last
Powering America hearing, we examined the important role that
consumer advocates play in the organized electricity markets.
Today, our examination of these markets continues as we turn
our attention to the role of financial market participants,
both why they trade financial products and the effects that
their transactions have in the Nation's seven RTO and ISO
markets.
With us today are witnesses who have extensive experience
in trading financial products on behalf of private institutions
and a major utility. We also have a rep from PJM
Interconnection, the world's largest wholesale electricity
market and the market monitor for the California independent
system operation, so welcome.
Financial market participants are playing an increasingly
visible role in the organized wholesale electricity markets. It
is claimed that financial transactions can improve the
efficiency of the physical electricity markets by providing
increased liquidity, mitigating market power, and improving
price formation.
In this hearing, I hope that the witnesses will explain
their perspectives regarding why we have financial trading in
the organized electricity markets and how this trading affects
consumers who ultimately pay for electricity services.
Each of the RTOs and ISOs allow financial trading to occur
in their markets including PJM and the California ISO. The most
commonly traded financial products are known as financial
transmission rights or FTRs and virtual transactions. While
these products can by used by traditional utilities to hedge
themselves against volatile price fluctuations, these products
are also bought and sold by financial traders such as banks,
investors, and other speculators.
While financial market participants ultimately trade to
make a profit, for sure, advocates for trading claim that
financial transactions strengthen the markets by increasing
trading volume and liquidity which in turn reduces volatility
and risk. Financial traders also claim to provide for the needs
of physical market participants by offering services such as
customized hedges and various types of options to limit the
risk.
However, measuring the overall contribution and benefits of
financial transactions in the electricity markets are certainly
difficult. Critics of financial trading argue that both FTRs
and virtual transactions extract value from the market without
providing equivalent benefits in return. I also understand the
FERC is currently reviewing several hotly debated proposals
which would reduce the opportunities for virtual transactions
to be used to profit from the market without adding
commensurate value.
Not surprisingly, many financial traders are opposed to
those proposals and as our Powering America series extends into
next year, we will continue to tackle some of the most complex
and challenging issues concerning both electricity markets and
the energy industry. Along those lines today, our job is to
take a hard look at whether FTR and virtual trading market
makes sense and answer the question, does financial trading
make the electricity markets more efficient and in turn result
in benefits to consumers?
So with that I yield to the ranking member of the
subcommittee, my friend from Illinois, Mr. Rush.
[The prepared statement of Mr. Upton follows:]
Prepared statement of Hon. Fred Upton
Good morning. At our last Powering America hearing, we
examined the important role that consumer advocates play in the
organized electricity markets. Today, our examination of these
markets continues as we turn our attention to the role of
financial market participants--both why they trade financial
products and the effects that their transactions have in the
Nation's seven RTO and ISO markets.
With us today are witnesses who have extensive experience
in trading financial products on behalf of private institutions
and a major utility. We also have a representative from PJM
Interconnection--the world's largest wholesale
electricitymarket; and the market monitor for the California
Independent System Operator. Welcome.
Financial market participants are playing an increasingly
visible role in the organized wholesale electricity markets.
It's claimed that financial transactions can improve the
efficiency of the physical electricity markets by providing
increased liquidity, mitigating market power, and improving
price formation. In this hearing, I hope the witnesses will
explain their perspectives regarding why we have financial
trading in the organized electricity markets and how this
trading affects consumers who ultimately pay for electricity
services.
Each of the RTOs and ISOs allow financial trading to occur
in their markets, including PJM and the California ISO. The
most commonly traded financial products are known as
``Financial Transmission Rights'' or ``FTR's'' and ``Virtual
Transactions.'' While these products can be used by traditional
utilities to hedge themselves against volatile price
fluctuations, these products are also bought and sold by
financial traders such as banks, investors, and other
speculators.
While financial market participants ultimately trade to
make a profit, advocates for trading claim that financial
transactions strengthen the markets by increasing trading
volume and liquidity, which in turn reduces volatility and
risk. Financial traders also claim to provide for the needs of
the physical market participants by offering services such as
customized hedges and various types of options to limit risk.
However, measuring the overall contribution and benefits of
financial transactions in the electricity markets is difficult.
Critics of financial trading argue that both FTRs and virtual
transactions extract value from the markets without providing
equivalent benefits in return. I also understand that FERC is
currently reviewing several hotly debated proposals which would
reduce the opportunities for virtual transactions to be used to
profit from the market without adding commensurate value. Not
surprisingly, many financial traders are opposed to these
proposals.
As our Powering America series extends into next year,
we'll continue to tackle some of the most complex and
challenging issues concerning both the electricity markets and
the energy industry. Along those lines, today, our job is to
take a hard look at whether FTR and virtual trading makes sense
and answer this question: Does financial trading make the
electricity markets more efficient, and in turn, result in
benefits to consumers?
I look forward to the testimony of our witnesses.
Mr. Upton.
So with that, I yield to the ranking member of the
subcommittee, my friend from Illinois, Mr. Rush.
OPENING STATEMENT OF HON. BOBBY L. RUSH, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS
Mr. Rush. Well, thank you, Mr. Chairman. And Mr. Chairman,
I want to applaud you for holding this important hearing today.
While we have an opportunity to examine the witnesses
before us, we will be looking at the role of financial trading
within the electricity markets. Mr. Chairman, while this may
appear to be an obscure topic that the American people and even
members of the subcommittee may not be intimately familiar
with, it is important to keep in mind that these financial
trading tools directly impact the cost that consumers pay for
their electricity.
In reviewing the testimony for today's hearing, Mr.
Chairman, there seems to be unanimous agreement that financial
tools such as FTRs as well as day-ahead forward and real-time
spot markets play key roles in improving the efficiency of the
physical electricity market by providing increased liquidity,
mitigating market power, and decreasing price volatility, all
of which ultimately benefit America's consumers.
Additionally, Mr. Chairman, it has been noted that the FTRs
provide forward pricing that helps gauge the need for
additional infrastructure investment so that unnecessary
construction and the subsequent costs associated with
overbuilding are not passed on to the consumers.
However, Mr. Chairman, while all of our witnesses agree
that these financial trading tools are indeed necessary, there
also seems to be a consensus that some modifications may in
fact be needed in order to ensure that these markets are
operating in a way that is transparent, that is open, that is
fair, and that is competitive. The discrepancy within the
testimonies center around what reforms might be needed in order
to adequately achieve these objectives.
Specifically, Mr. Chairman, I look forward to hearing the
panelists on two pending reform proposals forwarded by PJM that
FERC is currently considering regarding the up-to Congestion or
UTC transactions and how FERC's decision will impact consumers.
Additionally, I am interested to hear from our panelists on the
recent DOE notice of proposed rulemaking and whether they
support or oppose FERC providing additional subsidies to some
form of generation, coal or nuclear, over and above other
resources.
Finally, Mr. Chairman, it can be no surprise that for me
the most important factor in deciding whether any reforms are
needed, with the panel, how they might impact consumers. I look
forward to engaging our witnesses or their ideas for ensuring
that RTOs and ISOs are first and foremost responsive to the
needs of the customers.
Additionally, I want to make sure that FERC has the tools,
expertise, willingness, and authority to administer these
financial markets in a way that would be fair, transparent,
open, and competitive so that consumer interests are in fact
the guiding principles and the most important priorities of the
RTOs and the Commission.
Mr. Chairman, I look forward to this hearing.
Mr. Upton. Thank you, my friend.
It is my understanding that two other subcommittees are
meeting at this same time, so Chairman Walden is going put his
statement into the record. Are there any Members on our side
that would like to use part of his 5 minutes?
Seeing none, is there anyone on your side that needs Mr.
Pallone's time?
Mr. Rush. Ranking Member Pallone is also at another
hearing.
Mr. Upton. So we will allow those opening statements to go
in.
[Mr. Walden's and Mr. Pallone's statements appear at the
conclusion of the hearing.]
Mr. Upton. So we will move to the testimony, to our
distinguished panelists. We are first joined by Wesley Allen,
the CEO of Red Wolf Energy Trading, on behalf of the Financial
Marketers Coalition.
Thank you all in advance for submitting your testimony so
that we could see it yesterday. And if you would summarize,
each of you your testimony, in no more than 5 minutes, at which
point we will do questions from the Members that are here.
So Mr. Allen, welcome. You are recognized for 5 minutes.
Thank you.
STATEMENTS OF WESLEY ALLEN, CHIEF EXECUTIVE OFFICER, RED WOLF
ENERGY TRADING, ON BEHALF OF FINANCIAL MARKETERS COALITION;
ERIC HILDEBRANDT, PH.D., DIRECTOR, DEPARTMENT OF MARKET
MONITORING, CALIFORNIA INDEPENDENT SYSTEM OPERATOR CORPORATION;
MAX J. MINZNER, PARTNER, JENNER & BLOCK, LLP; NOHA SIDHOM,
CHIEF EXECUTIVE OFFICER, TPC ENERGY, LLC, ON BEHALF OF THE
POWER TRADING INSTITUTE; VINCENT P. DUANE, SENIOR VICE
PRESIDENT, LAW, COMPLIANCE & EXTERNAL RELATIONS, PJM
INTERNCONNECTION, LLC; AND CHRISTOPHER MOSER, SENIOR VICE
PRESIDENT FOR OPERATIONS, NRG ENERGY, INC.
STATEMENT OF WESLEY ALLEN
Mr. Allen. Good morning, Chairman Upton, Ranking Member
Rush, and members of the subcommittee. Thank you for inviting
me to share our opinions of the electricity markets. My name is
Wesley Allen. I am CEO of Red Wolf Energy Trading, a small
trading firm headquartered in Raleigh, North Carolina. I am
representing the Financial Marketers Coalition which is a group
of similarly situated companies transacting in the ISO/RTO
markets.
Red Wolf is a small company. We employ about a dozen
employees scattered around the United States specializing in
transacting the ISO/RTO energy markets. First and foremost, we
support competitive markets. The transactions that we engage in
clear the ISO day-ahead markets and then settle on the real-
time. While we have been around for about 10 years, the type of
activity we engage in has been around for longer and started
when FERC began restructuring the electricity markets in the
early 2000s.
The purpose behind restructuring was to add competition and
liquidity, price transparency, and to shift risk from consumers
to investors. While the road to the restructuring wasn't always
smooth, after almost 20 years I believe it has been a success
although there is room for improvement. The trading we do
broadly is called virtual trading. Every ISO/RTO in the country
allows virtual trading with one exception, the western Energy
Imbalance Market.
When the FERC was restructuring the electricity markets
they realized without participation by companies like ours many
of the goals they were trying to achieve would not be possible.
One of the goals of restructuring was breaking up natural
monopolies. Financial participation is the engine that drives
competition and liquidity in the transparent RTO/ISO markets.
Specifically, we engage in three types of transactions: an
increment offer which sells electricity, a decremental bid
which buys, and, lastly, a more refined ISO/RTO market such as
ERCOT, a point-to-point transaction which is a basis or spread
trade that transacts on the congestion between two locations on
the transmission grid.
Electricity is uniquely localized, and without
participation in these markets generation and load-serving
entities could exercise market power. Generation can exercise
market power by economically withholding the electricity they
supply. They could sell less power in the day-ahead but at a
higher price. Think of what OPEC does in the oil markets.
But not all generation withholding is nefarious in nature.
Some is risk management. Contracts awarded in day-ahead are
financially binding. Some generators may opt not to schedule
their full output in case the wind doesn't blow or if they
should have an equipment failure. Likewise, load can do
something similar by underbidding their load and therefore
buying most of their needs at a lower day-ahead price, then
purchasing the remainder in the real-time. In these cases,
virtual traders such as ourselves are assuming the risk that
the utilities are unwilling to take.
The purpose of the day-ahead is to pre-position the markets
for the needs the next day. Electricity being a high/low class,
it is necessary not only to commit the right amount of
generation, but to commit generation in the right location in
order to have an efficient and reliable market. Given the
natural monopolies to the market power that would otherwise
exist, financial participation is critical.
A great deal of time in today's hearing will be spent on
the forward markets. While efficient forward markets are
critical, so is price formation in day-ahead and real-time
energy markets. If prices are incorrect in the day-ahead and
real-time, then the wrong signals will be sent to the forward
markets. The FERC has been working on price formation for some
time now. The conclusions and improvements they have been
working towards are going a long way to improve the markets. My
only regret is it is taking a long time.
Our participation in these markets has been under attack.
Some have grown weary of competition and long for the former
structure. That said, there have been a couple of notable
electricity economists that through analyzing market outcomes
have put a dollar figure on the efficiency gained by our
participation. Dr. Wolak found that our participation in the
California ISO increased market efficiency in the first year of
virtual trading by $70 million per year.
Additionally, Wolak found that by more efficiently
committing and dispatching resources, our trading, virtual
trading reduced greenhouse gas emissions by somewhere between
650- and 537,000 tons annually. Dr. Patton, the independent
market monitor at MISO, found that at a minimum financial
market activity added $65 million in increased efficiency.
While most recognize that virtual trading adds efficiency
in RTO/ISO markets, more could be achieved. Nearly half of all
virtual transactions at less refined ISOs are done in a price-
insensitive manner. More refined ISOs allow basis tradings,
specifically ERCOT. Dr. Patton has been advocating for this
product at MISO for over 5 years. With implementation scheduled
for several years from now, we believe these critical changes
are taking too long.
In conclusion, virtual traders add efficiency to ISO/RTO
markets by injecting competition and liquidity that would be
absent without them. Thank you and I look forward to your
questions.
[The prepared statement of Mr. Allen follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Upton. Thank you.
Next, we are joined by Eric Hildebrandt, director of Market
Monitoring for the California ISO. Welcome.
STATEMENT OF ERIC HILDEBRANDT
Dr. Hildebrandt. Good morning, Congressman. Thank you for
inviting me today. My name is Eric Hildebrandt, director of
Market Monitoring at the California ISO. The Department of
Market Monitoring serves as the independent market monitor for
the California ISO. The Federal Energy Regulatory Commission
requires each ISO to have an independent market monitor whose
mission includes, quote, ``the protection of consumers and
market participants by the identification and reporting of
market design flaws and market power abuses.''
My testimony today highlights a major market design flaw
that exists in all ISOs which is costing transmission
ratepayers at least $400 billion per year. This flaw involves
the auctioning by ISOs of financial instruments called
financial transmission rights or FTRs. California calls these
congestion revenue rights or CRRs.
Ratepayers of load-serving entities pay the full cost of
the transmission system through transmission access charges and
also higher prices when congestion occurs. All congestion
revenues collected by ISOs should therefore be allocated back
to transmission ratepayers. In fact, FTRs were initially
developed as a way to fairly allocate congestion revenues back
to the participants who pay for the transmission system.
All ISOs currently allocate FTRs to load-serving entities
based on their projected use of the transmission system. We
support continued use of FTRs in this way to provide load-
serving entities with a hedge that offsets the congestion costs
they may incur. However, we believe that all additional
congestion revenues that remain after settlement of these
allocated FTRs should also be refunded to transmission
ratepayers.
Currently, however, after allocating FTRs to load-serving
entities, ISOs then auction off additional FTRs. These FTRs are
essentially price swaps. But unlike price swaps for other
commodities, FTRs are not cleared and settled based on bids
from willing buyers and sellers. Instead, ISOs auction off FTRs
and then pay off these FTRs using congestion revenues that
would otherwise be refunded to transmission ratepayers.
Unfortunately, the revenues collected from the auctioned
FTRs consistently are much lower than what ISOs pay out. This
makes FTRs highly profitable for financial entities, but these
profits directly reduce congestion revenues refunded back to
ratepayers. We estimate ISO ratepayers nationwide are losing at
least $400 million per year from FTRs sold at auction. Almost
all of these profits are going to purely financial entities and
trading companies with a very small portion of FTRs purchased
as potential hedges against congestion costs.
In California, ratepayers lost over $680 million since 2009
or about $75 million a year through the auction. Ratepayers
receive only 52 cents in the auction for each dollar that the
ISO pays out to these FTRs. This represents a profit of nearly
a hundred percent for financial entities purchasing these FTRs.
In the PJM Interconnection, data indicated ratepayers have
lost at least $1.2 billion in FTR auctions, or about $170
million per year. As a result, PJM's independent market monitor
and the Organization of PJM States are calling for changes to
PJM's FTR process to ensure all congestion revenues are
refunded to ratepayers.
In New York, recent analysis by Stanford University shows
that non-load-serving entities received FTR profits of over 900
million since 1999, or about $60 million per year. As explained
in a 2014 expose in the New York Times, FTRs were originally
designed to help protect electricity producers, utilities, and
industries that need to buy power, but, quote, Wall Street
banks and other investors have stepped in, siphoning off much
of the money.
In the Midwest ISO, ratepayers have received less than 80
percent of day-ahead congestion rent since 2010. This
represents a loss of at least a hundred million dollars per
year from the FTR auction. If ISOs don't take action to address
this issue, the FERC will need to take action to protect the
Nation's transmission ratepayers.
Thank you again for the opportunity to be here today and I
look forward to answering any questions you have on this issue.
[The prepared statement of Dr. Hildebrandt follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Upton. Thank you.
Next, we are joined by Max Minzner, partner of Jenner &
Block LLP. Welcome.
STATEMENT OF MAX J. MINZNER
Mr. Minzner. Thank you. Thank you, Chairman Upton, Ranking
Member Rush, committee members. I appreciate the opportunity to
be here today. My name is Max Minzner. I am a partner at the
law firm of Jenner & Block. From 2015 until 2017 I was the
general counsel at the Federal Energy Regulatory Commission and
from 2009 to 2010 I was Special Counsel and the Director of
Office Enforcement at FERC where I helped design and oversee
the agency's enforcement program.
I believe that financial transactions play an important
role in today's energy markets. However, I think it is worth
distinguishing between two types of financial transactions.
First, some transactions occur within the RTO and ISO markets.
Generally, those financial products take their value from the
sales of physical energy and are designed to facilitate the
sale of physical energy in some way. Those transactions are
generally FERC-regulated.
Second, some transactions in energy derivatives occur
outside those markets. For example, trading can occur on ICE or
NYMEX. To the extent that those transactions are regulated, the
Commodity Futures Trading Commission oversees the markets where
they are traded. This division leads to a core question for
Congress and for Federal regulators: which products should be
traded in the markets regulated by FERC and which products
should be traded elsewhere?
To answer this question the Commission should focus on its
role as the regulator of transactions in physical energy. In my
view, considering the expertise, mandate, and jurisdiction of
the Commission, financial products should exist within the FERC
markets to the extent that they are helpful to improve the
functioning of these physical energy markets. They should not
be created or expanded past the point at which they are needed
to ensure that the physical markets work efficiently and
deliver value to consumers.
Right now, the financial products in the FERC markets
generally serve this purpose. For example, virtual bids and
offers can reduce price risk and improve reliability by
aligning the prices in the day-ahead and real-time markets for
electricity. Similarly, FTRs allow entities to reduce their
exposure to the risk of price variations.
While these products do have real value for consumers,
appropriate regulation of their trading by the Commission is
important. For example, FERC has correctly worked to ensure
that adequate credit requirements exist in the RTO and ISO
markets. These requirements mandate that market participants
have the financial ability to cover the obligations they
assume. FERC also needs to carefully coordinate with other
regulators. Given its jurisdiction, the CFTC has a role to play
in this area. These two agencies need to work together to
ensure coordinated regulatory efforts.
A robust FERC enforcement program is also crucial.
Financial products have played a role in many of FERC's recent
enforcement actions aimed at market manipulation. In
particular, the Commission has often targeted a form of
misconduct known as cross-market manipulation. Cross-market
manipulation occurs when a market participant takes positions
in two different but related markets. For example, a trader
might obtain a large financial position in a product that
derives its value from a relatively thinly traded physical
energy product.
By making large trades in the physical product, the trader
might be able to change its price in ways that enhance the
value of the financial position. Even if there is a loss on the
physical position it can be offset by a much greater gain in
the financial position. The Commission needs to make sure it
has the analytic and oversight tools necessary to exercise its
enforcement authority effectively and thoughtfully.
Finally, the Commission should be open to improving its
efforts in this area. These markets change quickly. As a
result, the Commission should be frequently assessing the
financial products and its markets, its regulatory approach,
and its enforcement regime. Thank you again for the opportunity
to be here today. I look forward to your questions.
[The prepared statement of Mr. Minzner follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Upton. Thank you.
Next, is it ``Noah''?
Ms. Sidhorn. ``No-ha.''
Mr. Upton. Noha--I am sorry--Sidhom, CEO of TPC Energy on
behalf of the Power Trading Institute. Welcome.
STATEMENT OF NOHA SIDHOM
Ms. Sidhom. Thank you. Good morning, Chairman Upton,
Ranking Member Rush, and members of the subcommittee. My name
is Noha Sidhom and I am CEO of TPC Energy, a privately funded
power trading firm. I am here representing the views of the
Power Trading Institute, otherwise known as PTI. PTI represents
a diverse group of energy market participants ranging from
large load-serving entities, suppliers, marketers, privately
held commodity trading firms, as well as funds with investments
in the power space.
My comments here today will focus on financial transmission
rights known as FTRs. FTRs are essentially the price of
congestion from point A to point B on the grid. These
congestion contracts reflect the increasing value of
transmission as more and more power flows across the lines from
power supply resources to the customers consuming electricity.
A good analogy is a toll road where the tolls increase during
rush hour. As road capacity becomes tighter with more commuters
driving to and from work, the price to use that road increases.
The same is true for electricity flow across the power
grid. FTRs are purchased in an open and transparent auction
that is connected by each RTO/ISO market. Market participants
compete by submitting bids for specific megawatt quantity of
FTRS on the transmission paths made available in the auction.
From the inception of the organized markets, the Federal
Energy Regulatory Commission directed the creation of FTRs as a
means to provide open access to the transmission grid. Congress
demonstrated its commitment to forward pricing in the Energy
Policy Act of 2005 by directing FERC to undertake a rulemaking
to implement long-term FTR auctions. And we think Congress was
correct and forward-thinking in supporting that framework.
Today, market participants utilize FTRs in a variety of
different ways to the benefit of consumers. Load-serving
entities who supply electricity to consumers utilize FTRs to
hedge the risk of the price of congestion when serving their
customers. Generation owners and developers utilize FTRs to
hedge their risks to price volatility in the power markets.
Financial participants provide liquidity and competition in
the FTR market which contributes to maximizing the value of the
transmission system, a benefit to load-serving entities.
Financial participants also utilize FTRs by including them in
portfolios of diverse products to provide competitive risk
management and hedging services to load-serving entities,
generation owners, and generation developers.
FTRs save consumers money in three key ways. First, they
provide an accurate price for the contracts that are allocated
to transmission customers representing consumers. We are
basically the tool on how to return those dollars back to
transmission customers. They provide a price for congestion on
the grid to determine whether or not the cost of congestion is
a more appropriate investment than the build-out of additional
infrastructure.
So essentially, do we just want to pay for the cost of
congestion or do we need to build new infrastructure? That is
really important because if we overbuild the system consumers
are going to pay for that for decades to come and it is going
to cost them billions of dollars.
They provide a price signal to lenders financing
infrastructure development and thus reduce the cost of
financing. Over the past 2 decades of implementing FTRs as a
core component of RTO/ISO markets, certain practices have
proven to be successful and should be adopted in every market.
Long-term auctions need to be implemented. None of the ISOs are
in compliance with Order 681 which mandated auctions that cover
at least the 10-year period. Currently, the longest term is 3
years.
Allocation of congestions costs caused by unplanned outages
should be allocated to those who caused the costs to be
incurred. New York ISO employs this practice and as a result
has far fewer unplanned outages. Every other ISO should be
encouraged to follow a similar practice. The FTR markets are
robust and there is increased liquidity year-over-year. The
Commission recently noted that there is zero evidence that a
redesign of the FTR markets is warranted.
That being said, there are challenges both in the FTR
markets and in the markets in general that impact the way the
FTR markets function. The key challenges at a high level are
lack of transparency and outage scheduling; network model
updates that are not consistent or transparent; the price
formation efforts at FERC should be expanded and expedited; and
the technology utilized by the RTOS and ISOs need significant
improvement.
Innovation and competitive prices for consumers are the
core of our American economy. The Commission has spent the last
2 decades promoting these markets and the financial products
that lie at the core of their creation and these economic
concepts have worked to benefit your constituents. The way they
think about electricity has fundamentally changed particularly
over the last decade. Now we have to go the extra mile by
ensuring market design flaws are fixed in short order,
maintaining competition by expediting price formation efforts
in long-term auctions, and pushing the RTOs and ISOs to take on
a much-needed upgrade of their hardware and software systems.
It is our responsibility as industry members to work with
you, FERC, and other stakeholders to ensure that these markets
remain competitive, liquid, and fair to continue to benefit
consumers. We look forward to working on future improvements
and thank you for the opportunity to testify here today.
[The prepared statement of Ms. Sidhom follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Upton. Thank you.
Next, Vince Duane, senior VP and general counsel for PJM,
welcome.
STATEMENT OF VINCENT P. DUANE
Mr. Duane. Thank you, Chairman, Ranking Member, members of
the subcommittee. My name is Vince Duane. I am a senior vice
president of PJM, and like my colleague to the right, Dr.
Hildebrandt, I work for an organization that administers these
markets, we don't participate in them. Indeed, our mission is
simply to deliver wholesale electricity at the lowest possible
cost to the consumer. And the litmus test for financial trading
in these markets is whether it furthers that mission. Quite
simply that is the question.
There are two points I would like to bring out to the
committee's attention that bear on that question and that are
unique to these electricity markets like PJMs. First, our core
function is a physical function. We commit generation for sale
and purchase and deliver it to the ultimate consumer. We do
this with the assistance of financial products that trade
alongside physical transactions and that is something that
makes us quite unique relative to other commodity markets where
primary physical markets are quite separate and distinct from
secondary financial and derivative markets.
We are a little bit of a hybrid in our financial markets
because we believe that financial products can bring liquidity,
they can bring price convergence, and can bring pricing
discovery to assist in the operation of the physical market,
but that is the standard. There is no other independent basis
for these types of transactions to exist in these FERC-
regulated markets unless they meet that standard. There are
other places for them to go.
We have in this industry our own secondary financial
markets. Mr. Minzner made reference to some of them--NYMEX,
Intercontinental Exchange. There are places to go outside of
the FERC-regulated markets if there are other needs for
financial traders and hedgers. The second point I would like to
make is that these markets are complex. I don't think I need to
say that but I will start with that point.
Some of you may have heard the term market design and
indeed these FERC-regulated markets are very heavily
engineered, very much rule-focused. We use rules, thousands of
pages of rules, in fact, that are on file with the FERC in the
form of a PJM tariff, and underlying those rules are models and
algorithms that do two things generally.
One, we use these things to dispatch and commit generation
to meet load to keep the lights on in the system and we do that
in a way that sets prices. So when you have prices that are
formed at least in part by market design, by rules and
algorithms, we have learned a few interesting things over time.
First, price dislocations can and do occur, and if these
dislocations are caused by a rule feature or by a modeling
difference, no amount of financial trading is going to correct
those price dislocations. In fact, it will just simply exploit
and profit that dislocation without bringing the arbitrage
value that you would theoretically expect to see.
Revenues in these systems are highly contested between
asset owners and consumers. So where trading exploits a price
dislocation without bringing any corrective value, essentially
it is just siphoning revenues out of that system. It is a hole
in the bucket and it is something that needs to be plugged as a
hole in the bucket.
So in conclusion, the question is whether financial trading
in these FERC wholesale electricity markets bring value. My
answer is yes, but with qualification. The important point is
you cannot assume the efficiency values that you would normally
see in purely financial markets such as those administered by
the SEC or the CFTC.
Those values are necessarily going to hold in these unique
physical electricity markets. But if they are rationalized and
if these trades are incented properly and if they are limited
where necessary, they can bring benefits. They do bring
benefits and transaction efficiency to the physical generation
owner, to the transmission customer, and ultimately to the
consumer. Thank you very much.
[The prepared statement of Mr. Duane follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Upton. Thank you.
Last, we are joined by Chris Moser, senior VP of Operations
for NRG Energy.
STATEMENT OF CHRISTOPHER MOSER
Mr. Moser. Good morning, Chairman Upton, Ranking Member
Rush, members of the subcommittee, and fellow panelists. My
name is Chris Moser, senior vice president for commercial
operations and all operations at NRG Energy. As such, I am
responsible for the physical operation of our power plants as
well as the purchase and sale of billions of dollars of coal,
natural gas, and power each year.
My employer, NRG, is one of the largest owners and
operators of power plants in the United States. Our portfolio
includes conventional plants such as coal, nuclear, natural gas
and oil, as well as a large renewable fleet of wind and solar
generation. NRG also operates a retail business that serves
approximately three million retail customers largely in Texas,
but also in the eastern States that allow retail electric
choice. As such, we come at this from both the merchant
generation side and from the retail providing side.
As a purely competitive company with no captive ratepayers
we earn what we make in the markets that we participate in. As
such, we believe that fair and robust competition in the
electric sector is the best means of delivering value to
consumers. But that comes with risk, and management of
financial and operational risk is critical to the competitive
markets and those participants in the markets.
NRG relies on a wide variety of tools to manage those risks
to remain competitive and to reduce the delivered cost of power
to consumers. Included in this tool chest are a wide array of
financial products traded within organized energy markets,
traded bilaterally between market participants, and through
centrally cleared exchanges. NRG uses FTRs and virtual
transactions every day to hedge and deliver affordable power to
consumers.
On the retail side, NRG uses FTRs to hedge against
congestion charges on the transmission system which allows us
to sell power to end use customers at predictable prices. By
allowing us to protect against unforeseen congestion costs on
the transmission system, we are able to offer customers
affordable, fixed-price power offerings. Without these
products, our company and others would have to charge higher
prices to manage that increased risk, that risk premium. That
cost would end up being included in retail sales which directly
increases consumer costs.
On the wholesale side, NRG likewise utilizes financial
products for price discovery and to ensure that our large
central station generation receive a predictable price for the
power that they produce. This includes selling power on a
forward basis which allows NRG to lock in prices. It also
includes purchasing FTRs to perfect those hedges and utilizing
virtual transactions to move power sales from day-ahead market
to the real-time market or vice versa. These tools are critical
to the profitable operation of our power plants and to the
overall stability of the wholesale competitive markets for
electricity.
In conclusion, financial bilaterals, FTRs, and virtual
transactions all play a critical role in the production and
delivery of affordable power to consumers. I thank you for the
opportunity to appear before the subcommittee and I am happy to
help with any questions.
[The prepared statement of Mr. Moser follows:]
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Mr. Upton. Well, thank you. Thank you all. We will now go
to questions from the Members, I guess.
The first question I have, Mr. Allen, you indicated in your
testimony that--I believe you said--the western alliance did
not participate in virtual traders. Is that right?
Mr. Allen. Yes.
Mr. Upton. So which States are in that western alliance?
Mr. Allen. It is the western Energy Imbalance Market, so it
includes Utah and Nevada, parts of Colorado. It is dispatched
as a part of the California Independent System Operator, but
convergence bidding--that is what they call virtuals in
California--is only allowed in the California ISO proper. So
most of California and a little sliver of Nevada is the only
place where virtuals are allowed to----
Mr. Upton. So by not having that would you say that those
folks in those States then pay, the consumers, themselves,
likely pay a higher utility cost, higher electric cost?
Mr. Allen. Higher than they would otherwise with the
competition and the liquidity that virtuals add. Yes, sir.
Mr. Upton. Let's see. Ms. Sidhom, in your testimony you
explained that financial markets participants increase
competition and efficiencies in the electricity markets. Can
you explicitly state how the trading of those FTR instruments
makes the markets more efficient?
Ms. Sidhom. Absolutely. So essentially what is happening
here is, you know, Dr. Hildebrandt explained these transactions
as a price swap and that is exactly what they are. FTRs are a
price swap. It is a fixed for floating. So the load-serving
entity gets the fixed and a financial entity will take on that
floating risk. So they are basically shifting risk away from
consumers and onto companies like mine that are willing to take
on that risk and can manage that risk and offer hedging
services.
So when you have all this competition in the market and
market participants that are willing to bid in an open and
transparent auction so you can go into any RTO/ISO Web site and
see who got the contract in the auction and the price they got
the contract, there are also multiple rounds systems of these
auctions so there is multiple opportunities for load-serving
entities to have some price discovery, as Mr. Moser was saying,
to then offload some of their risk in multiple rounds.
So essentially what we do is we go in and we provide
liquidity and price competition to benefit the consumer and
shift that risk of the volatile market away from them.
Mr. Upton. You also said in your testimony that they needed
to have an upgrade on the hardware and software.
Ms. Sidhom. Yes.
Mr. Upton. So I mean, where are they in that process?
Ms. Sidhom. That is an excellent question.
Mr. Upton. Do they understand the problem? I mean do they--
--
Ms. Sidhom. We don't have a really good answer to that
question because there is not a lot of transparency as to what
software and hardware upgrades have been made. We know DOE had
a $3 million grant that they gave to the Midwest ISO to improve
their day-ahead solve time so essentially so that when
generators get committed in day-ahead they have some time to
procure the gas. It is a gas-electric coordination initiative.
We really don't know where those funds went, what the
upgrades were like, what upgrades are necessary. It is kind of
all a big black box to us. But what I can tell you is that
several of the RTOs and ISOs have had a hard time solving their
auctions and that is an issue for us because that is a risk.
They may not solve the auction until the settlement period so
you essentially have positions on that you don't know what your
profits and losses are.
So that is a big concern. Financial institutions in this
country are utilizing great technology and they are processing
far more information than the RTOs and ISOs are and so is our
intelligence community. So we would really like more
transparency into what upgrades are necessary and a plan just
like any private company would plan, OK, over the next 3 years,
here is how we are going to spend dollars on making technology
upgrades.
Mr. Upton. Thank you.
Mr. Minzner, so as you talked particularly in your formal
role at FERC, have you found that the CFTC and FERC have worked
pretty well together as it relates to the transactions in terms
of their oversight role? Are there real squabbles? Are there
things that we need to know about?
Mr. Minzner. I think now their relationship is quite good
and the agencies have begun to work well together and have been
effectively able to coordinate their enforcement programs. I
think the relationship has waxed and waned. You may be familiar
with a case several years ago where the agencies ended up
litigating against each other in the DC Circuit over the scope
of enforcement authority.
I don't think anybody would view that as a desirable
outcome, but I do think as the leadership of the agencies have
worked together, tried to build the relationship, and tried to
build relationships at the staff level, many of those issues
have passed and I do think now the relationship is much
stronger and much more effective.
Mr. Upton. Thank you.
Mr. Rush?
Mr. Rush. Again I want to thank you, Mr. Chairman.
Ms. Sidhom, am I pronouncing it right?
Ms. Sidhom. Yes.
Mr. Rush. Do you believe that FERC currently administers
the financial trading market in a truly open, transparent, and
competitive way that best serves the interests of consumers,
and if reforms are needed do you believe that they could be
accomplished best administratively through a commission, or is
congressional action needed?
Ms. Sidhom. I don't believe congressional action is needed.
I think you guys already took the appropriate action in EPAct
2005 promoting long-term auctions. I think that FERC just needs
to actually push the ISOs to go in that direction and again
push them on the technology initiative.
The Commission recently looked at PJM's market design for
FTRs and they basically said this is working for consumers. It
is saving them money. It is providing the necessary
competition. The FERC was very clear there is no redesign
warranted. It is very important for these transactions to
actually occur within the RTO/ISO paradigm because the RTOs and
ISOs are the only ones that can model the constraints.
They can say, OK, we have a transmission line that is
coming online in 3 years from now. We have a unit that is
retiring here. We can reconfigure the right. So we used to have
load from A to B. That is where the load concentration was. Now
we have it from A to C, so we are going to reconfigure the path
where we need to price that congestion. They are really the
only ones capable of doing that so it is so important for them
to remain as part of the paradigm and FERC agrees. They don't
agree with us often, so I think it is great that they recently
agreed with us.
Mr. Rush. Mr. Allen, in your written testimony you say my
concerns from a previous hearing regarding the potential for
RTOs to shut out public interest and participation and you
said, and this concern should extend beyond consumers to
encompass all minority interests in the ISO/RTO stakeholder
process, including financial market participants.
How would PJMs propose reforms that FERC is currently
considering regarding the up-to congestion impact in this
process and, more specifically, what effect would these reforms
have on consumers?
And Mr. Duane, would you also chime in on that question?
Mr. Allen. Thank you, Ranking Member Rush. I think the UTC
case that came out of the PJM stakeholder process is a perfect
example of the minority interest that is not being protected.
If you look at the way the voting structure is in PJM for the
stakeholder process there is five different categories of
voting--generation owners, transmission owners, load-serving
entities, and financial market participants are one of those as
well. Most of the PJM membership it is lumped into what they
call the other supplier sector which is the sector financial
market participants are lumped into.
And just so you know, if an IPP or an independent power
producer is building a power plant, until that power plant goes
online they are lumped into the other supplier sector. So like
I was saying, most of the membership is there. And if you look
at how the voting occurred in the PJM stakeholder process you
had basically the utilities voting in one way and then
everybody else voting in a different way, but it passes because
the utilities, you know, have a large share of market power in
the stakeholder process.
So I do think reforms are necessary. And, really, when I
think about a stakeholder process I wonder, you know, I can
understand having a stakeholder process to determine smaller
issue things, but when it comes to market design and features,
I think, you know, a lot of that regulation should not be
coming from the utilities or from stakeholders. It should be
coming from the FERC or from Congress, someone other than--it
is analogous to the inmates running the asylum.
Mr. Rush. Mr. Duane?
Mr. Duane. Thank you, Mr. Rush. And I see we have limited
time so I will try and be very brief here. There is a lot to
say, but I will just refer you back to the fundamental test at
least in our belief is that financial trading has to benefit
the physical participants and the system as a whole including
the consumers and the generators, transmission customers. So
our stakeholder process overwhelmingly voted in favor of these
reforms and that covers both load interests and supply
interests.
Ultimately, at the end of the day the question of whether
these transactions bring that kind of value that I am
describing will have to be resolved by the FERC and that is why
they are there, to address those types of controversies.
Mr. Rush. Thank you. I yield back.
Mr. Upton. Mr. Olson?
Mr. Olson. I thank the Chair, and welcome to our six
witnesses, the special Texas howdy for Chris Moser. I can see
NRG's biggest power plant, the Paris Power Plant in Thompson,
Texas, from my house. That plant generates 36,000 megawatts of
power. Four Powder Basin coal trailers come down -- trains come
down every single day, 115 cars. They have four generators of
natural gas power and four generators with coal power.
And one coal power is very special, it is called Petra
Nova. They capture over 95 percent of the CO2 in the process,
put in a pipeline, sent it about 60 miles south southeast and
get oil out of the ground. That is happening right now in my
hometown, or in my home district of Texas 22. I can see that
from Sugar Land, Texas.
OK, my brag about Texas is over. Let's get serious.
Mr. Moser, unlike others on the witness panel today, your
company mainly uses financial products like an insurance
policy. What would happen if these financial products aren't
available?
Mr. Moser. The risk that we are otherwise covering with
those insurance products would either be borne by us and passed
through to consumers at what we think, you know, what we
estimate that would be or we would have to find a replacement
product which would not be administered by the PJM or the ISOs.
We would have to go to Nodal Exchange or something like that to
try and fill it somewhere else.
Mr. Olson. Is it different for retail and wholesale
products, I mean differences between those markets?
Mr. Moser. So as far as FTRs go, the FTRs as they are
constituted and show no difference between a retail or
wholesale when all you are doing is locking in the congestion
basis between two points and they are equally effective for
hedging either generation or retail.
Mr. Olson. And how often does a trade go bad and what kind
of internal oversight do you have to make sure that doesn't
happen?
So we have a very fulsome risk process and risk policy and
a risk department which oversees the trades that we put on. And
the definition of a trade going bad is probably different
between me and from one in which a strictly financial
participant is. So when I am talking about hedging I am
literally saying I sold something for $30 and I am buying it
for $28 and I have locked in $2 of margin.
So I am indifferent to what the FTR does because it is in
effect, if I paid $5 for the FTR and it comes in at 4 that
looks like a loss of 1, but in effect I was getting rid of risk
and I am happy because I locked in my margin. However, if a
purely financial or spec trader bought something for 5 and
ended up settling for 4 that would be the definition of a bad
trade. For me it is a hedge, it is not a bad trade. It was
eliminating risk that I wanted to eliminate.
Mr. Olson. Thank you.
Now let's bring in Mr. Allen. I understand that each region
offers different types of financial trading products. From your
experience, are there certain RTOs who offer unique or
particularly successful types of financial trading products? If
so, please explain.
Mr. Allen. Yes, sir. I do. I think it is called ERCOT.
Mr. Olson. I am familiar with ERCOT.
Mr. Allen. What is unique about ERCOT, you know, ERCOT in
Texas has the most vibrant retail market. And I think part of
the reason why they have the most vibrant retail market is they
have the widest availability of financial instruments to allow
retail competition. And what we have been advocating for both
at FERC and in the stakeholder process and now here before you,
we would like to see a point-to-point product--that is why they
call it an ERCOT--in all the ISOs. It is an excellent mechanism
by which it, you know, people can use it, retail load-serving
entities can use it to hedge.
The FTR is great. The FTR is a longer-term instrument. It
is a minimum of 1 month out a number of years. The point-to-
point product is a daily to real-time product that--it exists
somewhat in PJM, although they are trying to get rid of it. It
is a central for retail competition hedging.
Mr. Olson. Mr. Moser, do you care to brag about Texas, too,
like Mr. Allen? ERCOT?
Mr. Moser. Yes. So ERCOT is different than a lot of the
other markets in a couple of fundamental ways. First of all, it
is one of the few places where we see load growth. There is
very little load growth in other places. Texas is growing
between, depending on how you do the math, 1\1/2\ and 2
percent.
Other markets, the other major difference is Texas is an
energy-only market. We only make money when we are dispatched
and we run or when a customer freely chooses for us to be their
retail electric provider. You know, we are not a utility in
that respect, but we also don't have any capacity payments,
which are--call it insurance policies that other assets and
other markets have.
Mr. Olson. My time has expired. Chairman, I did not mention
my Astros being the baseball World Series champions. I yield
back.
Mr. Upton. We are proud of the Astros.
Mr. McNerney?
Mr. McNerney. I thank the chairman. I don't really need to
brag about California every time I get the microphone,
Chairman.
You know, I found your testimony very enlightening, you
know, there is so much to learn. It is a complicated market, so
thank you for coming and giving us your testimony. I would like
to start with Mr. Hildebrandt.
Do you consider yourself to be like an inspector general of
the Cal ISO system, I mean analogous to Federal agencies?
Dr. Hildebrandt. I wouldn't call it inspector general. It
is called the independent market monitor. FERC requires each
RTO/ISO to have one. I think I view our job is to be, you know,
analyze the data, monitor the markets closely, and call it like
we see it, objectively, for both the FERC, for our management,
for the board, and for stakeholders as well.
Mr. McNerney. Well, how would you respond to Mr. Allen's
remarks about the Energy Imbalance Market, his claim that their
entry to Cal ISO improved efficiency and reduced greenhouse
gases?
Dr. Hildebrandt. Well, I think he was--the question to him
was why don't they have virtual bidding and if they did I guess
would it lower prices. And the reason they don't have virtual
bidding is there's no day-ahead market in the Energy Imbalance
Market. So to have virtual bidding you have to have day-ahead
market and real-time market. There is no day-ahead market in
the Energy Imbalance Market, so of course they don't have
virtual trading there.
Mr. McNerney. So it is not a real clear case.
Dr. Hildebrandt. It is not an issue. You know, if they were
to join the California ISO and have a day-ahead market they
would therefore have virtual trading as well.
Mr. McNerney. One of the things you mentioned was that the
markets should be organized to allocate auction revenues
better. You sort of dwelled on that. How would you go about
doing that?
Dr. Hildebrandt. Well, I think where--so as I tried to lay
out we agree that FTRs should be used to allocate congestion
revenues back to the transmission ratepayers, but we are
calling on the ISOs to not auction off additional FTRs. And if
they did that all the congestion revenues, if there was just no
auction it would automatically go back to transmission
ratepayers.
Ms. Sidhom, I think her first point was that FTRs are a way
of getting congestion revenues back to ratepayers.
Mr. McNerney. Right.
Dr. Hildebrandt. Well, if you just don't auction them they
automatically go back to ratepayers. And they are doing a very
bad--the FTRs, if you view it as an instrument for returning
congestion revenues to ratepayers they are failing miserably at
that. In California they are only returning 50 cents on the
dollar and in other ISOs it is more, maybe 80 cents on the
dollar.
So they are not returning--so our proposal is pretty
simple, is allocate FTRs to load-serving entities but then
don't auction off the rest, a lot of those congestion revenues
to go back ratepayers. If, you know, the free market, they are
free to buy and sell hedges, insurance, if you will. You know,
I think that is the role that financial entities they are very
creative people. They are good at managing risk. I think they
are free to sell price swap contracts to generators such as NRG
to hedge their risk.
And we think that mechanism, a market between, you know,
willing buyers and sellers is what will give you the correct,
efficient, and fair price for I think what has been called,
here, insurance policies.
Mr. McNerney. All right, thank you.
Mr. Minzner, you sort of dwelled on the cost market and
manipulation between the physical market and the sort of
financial markets. How would you propose that they be better
regulated? Is there an important distinction that needs to be
made between the types of transactions or how would you do it?
Mr. Minzner. So I think that is a great question. You know,
cross-market manipulation has been something the agency has
focused on in its exercise of enforcement authority ever since
EPAct 2005, which arose out of the western power crisis largely
focused in California. I do think FERC has been doing a good
job at looking at this type of conduct trying to build the
analytic and oversight tools it needs to be able to detect the
conduct and when appropriate stop it.
I do think it is an area where the agency has had to make
sure it has the data it needs about trading both in the FERC-
regulated markets as well as the markets regulated by the CFTC
and other regulators. As you can imagine, for market
participants they care about the financial positions they hold
broadly across all the markets, so it is important for the
agency to make sure it can see all of those positions. I think
it is an area where the agency has been succeeding largely, but
it is certainly a work in progress.
Mr. McNerney. I wanted to ask you a question, Ms. Sidhom,
but I have run out of time, so you will have to take it up with
another--I know you wanted to respond to Mr. Hildebrandt's
comments. I yield back.
Mr. Upton. Mr. McKinley?
Mr. McKinley. Thank you very much, Mr. Chairman. Sorry that
I slip out. Like you said, we have another meeting going
downstairs to get back to.
I missed some of the presentations that you had,
particularly Mr. Duane's comments from PJM. But we have had a
series of hearings in the last year-plus over resiliency and
dependability in our grid, and so as a result perhaps, I know,
I think in your testimony you were going to say something about
the rule, or the directive coming from the DOE over to FERC,
how to take care of this.
One of the arguments that I have heard here so many times
in committee has been market rates. The market rate should make
that determination. Well, I am in agreement to some extent, but
the market rate there should be a difference between market
rate and dependability rates so that we know when we have a
polar vortex or some problem that we know we can count on their
being power available to folks.
Because of this pricing system that we have set up, I am
concerned about how that could be, how that is going to come
into play if FERC were to recognize that dependability is just
as important as market rate. Because on market rate I am trying
to find an insurance policy for people that during bad weather
they are going to have electricity.
And I know it has been a very divisive issue ever since
that has come out, and we know that in PJM 20 percent of the
power plants went down during that period of time. So I am
looking for that kind of support level in the pricing.
So, Mr. Duane, if you can give me some, a little bit better
explanation, a little bit of how the financial trading tools,
how they could be impacted if FERC were to come out with some
kind of movement which in many respects it would be like an
insurance policy that would give us some assurance that we are
going to have power for our grid.
Mr. Duane. Right. Thank you, Mr. McKinley. You know, you
are touching as you point out on a very complex and
controversial area and it is a fair question to ask right at
the outset, are these organized markets returning a price that
is fully valuing all aspects of the infrastructure that people
are relying on to keep their lights on and to heat their homes
and power their businesses.
It is a fair question because you can't assume in these
markets that just where supply and demand meet you will get the
right price because, as I mentioned, they are very highly
engineered and revenues in these markets are very highly
contested. You have the Department of Energy asking the
Commission right now, are these markets adequately compensating
generators for the full panoply of value that they are
providing or is there something missing in the markets.
And the gauntlet that has been thrown down when you also
consider on the other side of the equation are consumers who
are very wary of paying any more than they need to for
electricity. So we have to ask ourselves a question, is the
system working? Are the prices correct? When you hear the term
price formation that is really what it means, are prices being
formed correctly in these very heavily designed markets.
The point of interplay with the financial trading is if we
are not getting any efficiency value to assist in these markets
from financial trading it really is siphoning revenues off the
top. It is a hole in the bucket in the system. And the
squabbling that is going on between load and generators as to
whether generation is getting paid enough, whether load is
paying too much, you know, there is another point to be made
here is like, well, are we running a system that is fully
efficient or are we having some leakage here so that the pie is
shrinking.
And I think the point here is there is a lot of value for
financial trading, but where it isn't providing value it needs
to be curtailed and limited, rationalized, so that we do
preserve revenues to support the physical participants in the
market.
Mr. McKinley. We also spoke at the last hearing about the
Longview Power Plant and the impact that has as the most
efficient coal-fired power plant in America, but because of the
network of pricing they are having trouble being able to market
their electricity into the system. And so you all were going to
get back to me. I haven't heard from anyone yet.
Mr. Duane. OK. Well, I apologize for that. I am not
familiar with the request itself, but we will definitely get
back with you on an examination of that question. We are very
familiar with the Longview Plant. It is a relatively recent
coal plant, highly efficient waste coal facility. It is located
right on top of the Marcellus Shale fields so it does face
stiff competition from a lot of new combined cycle generation.
But your larger point and I think it is one we agree with
at PJM is that when you are running a reliable system over the
long term and you want resiliency, putting all your eggs in one
fuel basket doesn't sit well with a lot of engineers and
planning people, so we are sensitive to the point.
Mr. McKinley. Thank you very much. I appreciate it. I yield
back.
Mr. Upton. Mr. Peters?
Mr. Peters. Thank you, Mr. Chairman.
I wanted to get back to Ms. Sidhom. So it is always a
little difficult because I get, you know, we don't have a
discussion. We sort of get six pre-prepared things which are
all very interesting, but I am trying to connect where the
differences are. What I would like to see, maybe you could
respond to Mr. Hildebrandt's concern that consumers aren't
getting the value of these trades particularly on FTRs.
Ms. Sidhom. Absolutely. So I think California is unique in
that it has some of its own challenges with the markets. And
the problem is not with the FTR product, the problem is with
the market design. They have got significant modeling issues so
they will clear you out of the money all the time. Meaning,
let's say, I will just give you an analogy of the equities
market to keep it simple.
Let's say you want to buy a stock for $30 and your broker
comes back and says we sold it to you for $60. That happens in
California all the time. There is something wrong with their
pricing model. Also, their outage scheduling is a real problem
so about over 50 percent of the time the outages are not
submitted in a timely manner to be modeled in the auction and
that is what causes a lot of what Dr. Hildebrandt is referring
to as revenue adequacy, so the underfunding of the payments
going back to the load-serving entities.
So it is not the FTR product that is the problem. You
absolutely need the auction because the auction is how you
actually price the allocated rights. So essentially, you
allocate rights to load-serving entities and then how do you
get a price for those allocated rights. I give you ten stocks,
what is the price for them? The price for them is obtained when
the access capacity is auctioned off. I don't know how else you
would be able price them.
As Vince's testimony stated, the FTRs were an integral part
of the market design. They weren't just an option, they are how
we provide open access.
Mr. Peters. OK. Mr. Hildebrandt, can you respond to that?
Dr. Hildebrandt. OK. Working backwards, it is absolutely
incorrect that the allocated, we call them CRRs, FTRs are
priced based on the auction. They are allocated out, load-
serving entities hold them, and they get paid the congestion
revenues. So by not selling them, they get a dollar, the full
dollar in congestion revenues versus which is on average a
price in the auction which is only 50 cents on the dollar.
So the ISO allocates to load-serving entities. They keep
those. They keep the congestion revenues. But then the ISO
auctions off additional FTRs which sell for 50 cents on the
dollar and those are bought primarily by financial entities
with--and then the payout directly reduces the pot of
congestion revenues which otherwise then gets fully refunded
back to transmission ratepayers.
So, and as California is different, it is true the payout,
our analysis shows while it is 50 cents on the dollar it may be
more like in the 70 or 80 percent range in the other ISOs. But
in other ISOs across the country, and we have now almost a
decade worth of experience that even in the other ISOs
ratepayers are only getting back about 70 or 80 cents on the
dollar of the congestion revenues that they are paying for.
Mr. Peters. So would there be some margin where they
shouldn't get back, do you think they should get back a hundred
percent?
Dr. Hildebrandt. Well, if entities are buying these as
hedges, if I am a generator and I am buying them as hedges I
would actually expect a hedge to go for premium. If I am buying
an FTR to take away the uncertainty of my congestion, I am a
generator, I am NRG and I want to sign a deal somewhere for the
fixed price and I want to get my power there from a generating
plant, I should be willing to pay a premium. In fact, I think
the hypothetical example he offered had him losing a dollar on
the FTR.
The fact is these are, they are earning, you know, it is an
insurance policy that pays you, you know, a hundred percent on
your premium. So it is not, so that analogy I think doesn't
work.
Mr. Peters. OK.
Dr. Hildebrandt. And, you know, if they were being
purchased as hedges we would expect the price to be, you know,
equal or above the congestion revenues. I guess our final point
is you don't need the ISO to run that auction because basically
we are auctioning off things, insurance that is backed that is
subsidized by ratepayers. Let the transmission ratepayers
decide if they want to enter into those contracts.
Have a market with if you want the ISO to run it, run a
market if you don't think, you know, that private trading firms
can do that, if you have the ISO run it base it on real bids
from willing buyers and sellers. The financial entities here
can offer to sell hedges, the generators here can offer to buy
hedges, and if you want the ISO to run that market that is
fine. But don't ask the transmission ratepayers to subsidize
that.
Mr. Peters. Ms. Sidhom, again, I have 7 seconds. Go ahead.
Ms. Sidhom. So there is a risk premium built in because of
these outages and that is why those dollars are not going back.
Mr. Peters. Right.
Ms. Sidhom. That is what is really creating the risk for
the buyers. And so there is a risk premium that is being built
in, but it is because of the market design issues.
Mr. Peters. It suggests that it is market design.
Mr. Chairman, I would yield back.
Mr. Upton. Mr. Shimkus?
Mr. Shimkus. Thank you, Mr. Chairman. This is a great
hearing. I want to commend Mr. Peters. It is a great way to
engage with our panel is to try to find where there is
discrepancy and I just want to thank him for doing that. I am
going to follow a little bit along because, you know, we are
concerned about the national grid and reliability, but we also
have our local parochial interests that deal with these
markets.
So I would like to start with Mr. Duane on in dealing with
when the transition from regulated markets to the RTO model,
PJM converted many entities from transmission rights to these
financial transmission rights. How do you protect against
additional risk for those who have lost their firm transmission
rights? Are there entities that end up becoming losers in this
transition?
Mr. Duane. It is a very fair question. The transition
really took place quite a few years ago, really over a decade
ago, and I think it is fair to say the transition from being a
firm physical customer to having a financial transmission
right, which as Ms. Sidhom said is a fundamental element of the
design structure, that was a fair exchange.
What has happened though is nothing is static. The system
changes. Load grows in different places. Load disappears in
different places. Generation comes, generation goes. That
changes the typology of the system and, frankly, the FTR was
intended to anticipate those changes and provide options. Not
just market options, but opportunities for people to designate
different pathways.
People being typically in PJM, these are load-serving
entities who are trying to manage the risk of congestion or
price differential. And as the system changes physically, there
are opportunities that the FTR provides to reconfigure your
pathways to reflect how electricity is more realistically
flowing to you today as compared to where it was, say, 10 years
ago.
But short of transmission infrastructure build, there will
be customers that are not as hedged today under this system as
they would have been 10, 12 years ago.
Mr. Shimkus. Right. And I would speak to expanding our
transmission grid to allow those more flexible markets instead
of, in essence, kind of dedicated pathways and convoluted
systems that sometimes we develop.
I want to go to Ms. Sidhom and Mr. Allen real quick. On
financial trading institutions such as yours when you execute
financial trades with the purpose of making a profit, when your
company makes money from a financial transaction such as this
financial transmission right, where does the payment come from?
Ms. Sidhom. So we are basically offering a product. The
payment comes from us offering this product which is where we
are basically saying, look, we want to take the risk away from
consumers, so how do we do that? We are natural buyers and
sellers to--or we are basically the willing buyers and sellers
to natural buyers and sellers, so that is where the payment is
coming from. We are basically offering the other end of that
transaction liquidity in the market.
Mr. Shimkus. Mr. Allen?
Mr. Allen. Yes, that is correct. Now there is a
differentiation between what our two entities do. They are more
FTR-focused. I am focused on the day-ahead and real-time. If we
add efficiency to the market, if we improve the commitment, if
we improve the reliability of the system then we make a profit.
If we create inefficiencies or we get the day-ahead wrong then
we lose money.
Mr. Shimkus. OK, so let's go to the consumer. Do the
consumers pay for your payout through their electricity bills?
Mr. Allen. Well, each ISO acts as essentially a clearing
broker where all of our transactions are cleared. So I put in
buy and sell orders with PJM, they return whether we make or
lose money. One thing to point out and I think it is important
and it is in my written testimony. What is the load-weighted
price of electricity in PJM? Wholesale level $29.23, so under
$30. What is the retail rate in that same area? It is about
$110 a megawatt, so wholesale prices are cheap. They are really
cheap.
Mr. Shimkus. Ms. Sidhom?
Ms. Sidhom. Yes. I mean I think we absolutely save the
consumer a lot of money. Both in MISO and PJM, they estimate
over $2.5 billion of savings a year from having these markets
in place. You know, these are heavy policed markets. The CFTC
is looking at us, FERC is looking at us. We have market
monitors like Dr. Hildebrandt looking at us. If FERC thought
that we were siphoning money from consumers I think they would
have put a stop to these transactions a long time ago.
Mr. Shimkus. I have 730,000 people watching me, so--anyway,
yield back.
Mr. Upton. Mr. Green?
Mr. Green. Thank you, Mr. Chairman, for holding the
hearing.
Mr. Moser, in your testimony you talk about FTRs hedge
against congestion charges for end user, end user consumers.
How much risk is there from the congestion charges that could
potentially be pushed to consumers if it weren't for this
product?
Mr. Moser. Well, it would be pushed indirectly to them
basically to the extent that none of the--or very few of--and
when I am talking about retail consumers here, I am talking
about homeowners not the large commercial and industrials who
have a more sophisticated way of going about it and tend to
shoulder some of the market things directly. But in terms of
consumers, if the FTRs didn't exist and we had to price that in
then rates would go up.
Mr. Green. In the Texas retail market, of course Texas is
different as we say all the time from other markets, but retail
market, where do we most often see congestion being an issue
and how are these products used within the State?
Mr. Moser. Yes. We have historically seen a decent amount
of congestion coming from the western part of the State where
you have a lot of the wind assets flowing into through
congested lines trying to get to Dallas and trying to get down
into Houston. Texas has built the CREZ lines to try and
alleviate the into-Dallas area portion and then they are
working on a Houston import project right now to try and
alleviate some of those congestions.
But those are two of the classic ones. Really, anytime you
are talking about congestion you are talking about, you know,
assets, generation far away from load pockets and so the load
pockets are often the congested pieces.
Mr. Green. In the wholesale market when it comes to selling
forward on a basis how do these products mitigate potential
losses?
Mr. Moser. So when we use, and this is different than just
FTRs, right. I mean, you know, through ICE, which was explained
by Mr. Minzner and others, we can go out and see where the
price of next year, next month is trading. We can put positions
on, sell some of our expected generation and lock, and then go
and buy some fuel against that lock in what we expect to be our
generation spread, our profit.
But those sales are often at hubs where people agree to
gather and make bulk purchases and sales. What we then would do
would be go and try and perfect that hedge by using the FTRs to
move where we have that sale to a location that approximates
our generation plant.
Mr. Green. OK. In your testimony you talk about 46 percent
of the NRG's coal capacity in Texas from 2017 to 2020 has been
forwarded or sold higher than other areas of the country. How
does that compare to the other generation sources like natural
gas at NRG? And of course you have a nuclear plant in southeast
Texas. Is one fuel source forward sold more than another and
what plays into that?
Mr. Moser. Yes. Oftentimes we tend to sell more of our coal
rather than the gas because the coal tends to be at the money
or in the money and so we have a large expected value with
that. Our specific portfolio is a bit like a barbell. We have a
lot of coal and nuke on one end which runs all the time and
then we have a lot of old expensive steam gas which doesn't run
very often so we tend not to hedge that as much and kind of use
that to try and hedge against our retail exposure.
Mr. Green. What are some of the differences or difficulties
in working in markets like ERCOT which lack capacity markets in
other ISOs where the capacity revenues are established for a
long-term forward basis?
Mr. Moser. Well, it is easier in a market like PJM where
you have a 3-year forward look at where the capacity prices are
in terms of trying to determine the economic viability of your
power plants.
Mr. Green. OK.
Mr. Chairman, that is my last question. But to follow my
other colleague from the Houston area, when your house has six
foot of water in it and you are so happy to have something to
cheer about in the World Series.
So--but again in my last minute, how did NRG deal with some
of the problems we had? I heard that for example the coal
plants had to shut down because the coal was so wet that
natural gas was still there and of course the nuclear plant
continued to produce.
Mr. Moser. The South Texas Project stayed online throughout
Hurricane Harvey. We did run into problems at a couple of gas
plants in the Greens Bayou which is in the northeastern corner
got flooded. Cedar Bayou which is down near the ship channel
was at one point we thought was going to get flooded. What we
did was basically we brought three shifts of people in--cots,
MREs--and prepared to ride out the storm, in effect.
But what you heard about Parish was absolutely correct. We
did have at one point those coal plants--look, coal doesn't
move up conveyors very well when it is liquid, it just kept
running down, so we had to switch over to gas on those and we
also brought the gas plants up. So I think at our low point we
were in the 70 or 75 percent availability across our fleet in
Texas. Limestone is far enough north that it wasn't impacted,
but.
Mr. Green. OK. Thank you, Mr. Chairman.
Mr. Upton. Mr. Griffith?
Mr. Griffith. Thank you, Mr. Chairman.
Dr. Hildebrandt, Mr. Shimkus asked some questions earlier
of Mr. Allen and Ms. Sidhom, and you heard their answers. In
particular, Ms. Sidhom said if there were real problems on
where their profit comes from, if it was negatively impacting
consumers that you would be all over them. So I am going to
give you a chance after you have heard their answers, what say
you?
Dr. Hildebrandt. Well, we are calling for this, and
actually the independent market monitor in PJM has been doing
this for 3 years. So the market monitors whose job, who have
the data and the information, whose job it is to look at these
kind of things, in fact, are calling this out and providing the
kind of analysis we are providing that is showing, you know,
ratepayers are getting only a fraction of the dollars back from
the FTR auction that they would otherwise get. So we are here.
That is why I am here today.
Mr. Griffith. What I am hearing from these folks, and I
don't know a lot about this product so I am not taking sides,
but what I am hearing is most everybody seems to think that
this in the end makes sure the consumers have power and that
they are getting a fair deal because these folks are making it
more efficient.
And all they are doing from what I gather in interpreting
their statements all they are doing in most cases is taking a
portion of the savings that go to the consumers and that is
where they make their profit by figuring out how to make the
system more efficient. Do you disagree?
Dr. Hildebrandt. Yes, I absolutely disagree. Part of the
issue here, we have two very different products being discussed
here today. There is the virtual trading and I believe the
benefits that Ms. Sidhom cited, I believe, is somebody's
estimate of what virtual trading may have saved. That is very
different.
Virtual trading is our trades between willing buyers and
sellers. When the ISO clears the virtual that is cleared as
part of an energy market which is a market between willing
buyers and sellers. In that kind of market there can be value
from that. However, in the FTR it is a very different product.
It is an auction. It is not an actual market. They are
auctioning these things off for 50 cents on the dollar.
In terms of the congestion revenues they are not providing
any value in terms of, you know, they are siphoning off money
which I think otherwise could be used to offset the costs of
investments in the physical system, physical generating plants
and physical infrastructure. So I think in that sense they are
siphoning money out of the system without increasing efficiency
in a way that ultimately can hurt reliability because it, you
know, it does decrease, you know, kind of the money that can be
used to improve the transmission system at a reasonable price
to consumers.
Mr. Griffith. So what do you think we should do to solve
the problem as you see it?
Dr. Hildebrandt. Well, as I have said, I think we continue
with the allocation of FTRs to load-serving entities. That
includes direct access customers who, you know, are buying
power through retail choice. But then stop the practice of
having ISOs auction off FTRs backed by congestion revenues that
otherwise go to load-serving entities. Stop that auction.
I think at that point my position is I think ICE, you know,
you heard the gentleman describe how ICE it is a private
company exchange. They provide long-term contracts for gas, for
energy. You know, let the markets work. Again these gentlemen,
Mr. Allen and Mr. Moser can deal through ICE or bilaterally as
far as selling a hedge at the appropriate price. That is what
they are good at.
If policymakers really think ISOs, that the free markets
can't work there and ISOs need to step in, then do that through
an FTR market that only clears bids from willing buyers and
sellers, so only if load-serving entity bid into that market to
sell a hedge would they be exposed to having to sell an FTR.
Mr. Griffith. All right. Now the dilemma that we have is we
only get 5 minutes for questions. Mr. Allen, do you want to
respond to any of the comments that were made? I probably won't
have time for you, Ms. Sidhom, to get back in, but maybe
somebody else will give you a minute.
Mr. Allen. I am glad we agree the virtuals are good. As far
as the other stuff what I would advise, there are many market
monitors throughout the country. Not all of them agree with the
position that Dr. Hildebrandt has. Any as sort of analysis that
FERC or you guys see about the value or the lack of value of
FTRs coming from one market monitor or another, all I ask have
it peer-reviewed. There needs to be some sort of peer review of
anybody's analysis so that, you know, and market monitors have
a tremendous amount of power and their analysis should be peer-
reviewed. Thank you.
Mr. Griffith. And I guess you all can appreciate that this
is not our field or at least most of us up here, and we are
just trying to get the facts to make sure the American
consumers are getting the best deal that they can get. And with
that I yield back.
Mr. Upton. Mr. Johnson?
Mr. Johnson. Thank you, Mr. Chairman. I appreciate the
opportunity. And thank the panel for being here this morning.
You know, the FERC chairman, Neil Chatterjee, recently stated
that one of the FERC's top priorities moving forward will deal
with de novo reviews. As I am sure some of you are aware, the
majority of the current court cases surrounding FERC's
interpretation have gone on for years.
Mr. Allen, do you have any thoughts on how FERC should
address this?
Mr. Allen. I would think that something along those lines,
de novo review, is probably best left to the courts to decide.
It is not, you know, I am not a lawyer, I am not, so I really
can't offer you a good opinion on it other than I think it is
probably, you know, let the courts figure it out.
Mr. Johnson. OK. Ms. Sidhom, do you have any thoughts?
Ms. Sidhom. Absolutely. And I think that Chairman
Chatterjee addressed that issue because FERC has lost on it
multiple times in court now. We all want a robust enforcement
program. That is really important for us. We need a cop on the
beat. Nobody wants to participate in a market that is not being
heavily policed, especially such a volatile market.
So, but what we really want is an efficient enforcement
process and I think that the courts are making the absolute
right decision on de novo review.
Mr. Johnson. OK, all right. Now maybe some of this has
already been covered so I apologize if you feel we are being
redundant here. But we have heard from Dr. Hildebrandt
regarding his thoughts on FTRs. Mr. Duane, what are your
thoughts? Do you have any?
Mr. Duane. You know, I think he is asking a question that
is a legitimate question to ask. I think it is always the right
question to ask, because at the end of the day as I said
several times here this morning, and I don't mean this to
disparage the financial participants, but they are there to
serve a purpose and that is to make sure that the physical
participants and, in particular, the consumer at the end of the
day are getting the best deal possible out of these markets.
That is what the fundamental design mission is.
And I think they can bring that benefit, but it has to be
scrutinized. So the questions about the design of the market,
they get pretty arcane when you are looking at the allocation
of FTR revenues and I honestly don't think I can add anymore to
that.
But the litmus I kind of use is if I see real risk
management, if I see someone speculating and taking risk off
the table, if I see them hedging, those are good types of
financial transactions and people should be entitled to earn a
return for providing those services and customers who pay a
premium to get that insurance should feel comfortable about
that.
Where I get more concerned is where there is arbitrage
which should bring convergence among prices, but I don't see it
actually happening. And that is really where I am coming from
at PJM is a concern that at that point we do have a siphoning
problem, we do have a hole in the bucket. I think FERC can
separate the babies with the bath water and we can put in place
rules to do that.
As far as the FTR market goes, I am just not at a point to
say that is an example of one of those types of problems.
Mr. Johnson. OK. Mr. Shimkus began to address this as well.
Monitoring Analytics, the independent market monitor for PJM,
found in the most recent State of the Market Report that--and I
quote. It is not clear in a competitive market why financial
transmission right purchases by financial entities remain
persistently profitable. In a competitive market it would be
expected that profits would be competed away.
Do you agree with this statement, and if not, why not?
Mr. Duane. No, I do agree with that statement. I am not
sure it is a fair characterization of what is going on in PJM
but, theoretically, yes, a competitive market should show over
time a balance. And if there is a persistent asymmetry and what
I think our market monitor is saying is that his observation
over a period of time is that there is a persistent asymmetry
and FTR traders have made money rather consistently.
I am not sure factually that is correct and I would want to
look into that further, but if that is correct it is the kind
of yellow flag that says maybe there is something structural in
this complex market design that needs to be examined so that we
do have a more symmetrical outcome.
Mr. Johnson. OK, all right.
Thank you, Mr. Chairman. I yield back.
Mr. Upton. The Chair would recognize Mr. Flores.
Mr. Flores. Thank you, Mr. Chair. And I appreciate this
hearing and appreciate the witnesses participating today. It
has been very informative.
One of the principal reasons we have hearings like this is
so that we as policymakers can determine how involved we should
be or not be in terms of trying to make sure that these markets
work correctly. So my first question is this. What potential
market regulatory reforms should Congress and FERC be
considering in order to improve market benefits associated with
financial trading?
So I would start with Ms. Sidhom. Can you share your
thoughts? And try to do it quickly if you can.
Ms. Sidhom. Yes, absolutely. We need long-term auctions
just like you guys mandated in the Energy Policy Act of 2005.
Those are integral to provide a forward price signal.
I also kind of want to address just a few comments that Mr.
Hildebrandt made. California just put out a report negating a
lot of the things that he said about FTRs, so its own ISO is
not in agreement with him. They specifically say there are
market design issues that they need to fix. So one of the
reforms we really need is better outage scheduling and I touch
on that in my testimony.
So, essentially, if I am a transmission owner and I don't
plan out my outage, I should have to pay the costs that are
incurred to the system for not planning out that outage. And
New York employs that very practice and they save a lot of
money. They have very few unplanned outages. That and
technology reform, I think, really needs to occur.
I mean we have certain ISOs where some of their modules
don't even work with like Chrome. They work with Internet
Explorer but old versions of it, like we are really behind in
technology.
Mr. Flores. OK. Mr. Allen?
Mr. Allen. Real-time congestion hedge like exists in ERCOT,
I would love to see that. We need to see that. It is necessary.
It is essential for retail competition.
Mr. Flores. OK. Mr. Moser?
Mr. Moser. I would say there is plenty of things on the
FERC docket already in terms of the different price formation
dockets that they have been sitting on for years that we could
move forward with immediately, some of the minimum offer price
rules and et cetera. So there is plenty of stuff for them to
do.
Mr. Flores. OK. I would ask you to supplementally follow up
and tell me what the top three or four are, if you would.
Mr. Allen. Happy to.
Mr. Flores. Mr. Allen, also in your testimony you stated
that competitive markets should be allowed to operate with
minimal Government intervention such as out-of-market
subsidies. If that intervention occurs, how is financial
trading affected and do you have any recent examples?
Mr. Allen. If you have an out-of-market payment going to a
certain class of generation assets it will distort market
outcomes.
Mr. Flores. Sure.
Mr. Allen. I think what is important is if there are
certain externalities that are not being looked at that aren't
being valued, whether it is carbon or reliability or so forth,
I would ask that they be placed into the market so the market
can respond to it and you don't distort market outcomes.
Mr. Flores. OK.
Mr. Minzner, in terms of enforcement of financial trading
you stated that financial markets inevitably move much faster
than regulators. I think we all know that about this town. Is
there anything Congress can do to ensure that FERC can remain
nimble and to be able to evaluate new offerings of increasingly
complex financial products?
Mr. Minzner. So I think that is a great question,
Congressman. I think largely it has been a success. I think
Congress has, when problems have arisen in the energy markets,
taken appropriate action--EPAct 2005 is a classic example of
that--but also left it to the agency recognizing the complexity
of these markets to adjust them as necessary as new products
have developed.
It is not just that the markets are complex. They differ
regionally. As you have heard, PJM is quite different from
California and they are both very different from Texas. That
has been a model that I think has been largely successful, but
I really do think it is up to the agency to be constantly be
reevaluating the structure of the market and the products that
are available.
Mr. Flores. Thank you, Mr. Chairman. I am going to yield
back a minute to you.
Mr. Upton. The Chair would recognize Mr. Barton.
Mr. Barton. Thank you, Mr. Chairman, and you and Mr. Rush
for this hearing.
I have not really followed the electricity markets for a
number of years, so I am trying to get my hands around what a
virtual transaction is. I don't know who to ask, I guess Mr.
Moser. Are these transactions that are called virtual
transactions, are they in and out the same day transactions?
Mr. Moser. Yes. To the extent that the ISOs, if you put
aside the FTR auctions, are running simply a day-ahead auction
for power delivery tomorrow, then what the virtual transactions
do is allow--so when I offer my plants in, you know, we will
take Joliet 6 and we will say it is a $35 unit and we will
offer that in to PJM in the market, and then if PJM needs $35
or higher power at that point I will get a commitment that I
then have to run to for the next day and I will get paid 35 for
it.
Mr. Barton. Well, that sounds like a real transaction.
Mr. Moser. That is a real transaction. But a virtual
transaction would be if, you know, if a financial participant
put in an offer at 35 and it looks just like generation in
terms of going into the stack, it can get chosen and then
basically what they have done is they have sold 35 in the day-
ahead market. They are going to get $35 times however many
hours times however many megawatts, and then when they don't
deliver anything the next day because it is virtual--and this
doesn't come as a surprise to the ISOs. The ISOs know what is
virtual and what is real--then that settles against whatever
the real-time price is.
So they basically have, they get paid 35 and then they are
going to pay back to the ISO whatever the real-time average is
for those same megawatts for that same timeframe, and it may be
plus and it may be minus.
Mr. Barton. So they have to deliver but they don't have to
produce; is that----
Mr. Moser. Well, in effect, they are taking the financial
obligation of delivering, you know, no one expects virtuals to
deliver so make no mistake there. There is no chicanery there.
But they are basically a way of taking a position day-ahead
against the real-time sell.
Mr. Barton. But when a financial participant sells power at
$35 a megawatt hour----
Mr. Moser. Day-ahead.
Mr. Barton [continuing]. For tomorrow delivery----
Mr. Moser. Yes.
Mr. Barton [continuing]. Sometime that day, do they take a
position where they go in and buy, get a commitment to provide
that power tomorrow at a lower price?
Mr. Moser. Well, they may have, they may be doing that
because they have a longer term position on that the ISO is not
aware of. But generally speaking and in its simplest form, they
have said I am willing to sell $35 power because I think the
price tomorrow is going to be less than that and they are
willing to take that risk on what that is for tomorrow's price.
Mr. Barton. I guess the gentleman from California who kind
of monitors this, are these virtual transactions helpful or
hurtful to the real-time delivery of power and the pricing of
power? You know, because California as we remember--some of us
old-timers--10 or 15 years ago, you had the perfect market, you
thought, and it all went to pot.
Dr. Hildebrandt. OK. Well, our market is working pretty
well now, I think, Ms. Sidhom's comments notwithstanding. And
so, you know, again you really need to differentiate. I have
been talking today about financial transmission rights so, but
you are asking me then about virtual.
Mr. Barton. I am just trying to understand.
Dr. Hildebrandt. Sure.
Mr. Barton. Because I don't think the public understands
it.
Dr. Hildebrandt. We have them in our market. We think they
can be beneficial to help kind of to help converge the day-
ahead and real-time prices especially when you have a lot of
renewables, so they can be beneficial. Unfortunately, they can
be used also to manipulate the market. We have had cases like
that. And specifically, you know, there are now cases, public
cases, where that virtual trades have been used to manipulate
prices that then increase payments that entities who have
boughten firm transmission rights have.
So there is again have been some issues with cross-market
manipulation. If you stop the auctioning of the firm
transmission rights, I think then that would remove the issue
of cross-market manipulation between the virtual bidding, which
we are not proposing to get rid of in California, and can add
value and again is based on bids from willing buyers and
sellers as opposed to the firm transmission rights which are
distinctly different.
Mr. Barton. OK. Mr. Chairman, my time has expired. Thank
you for the courtesy of allowing me to ask them.
Mr. Upton. Yes. With that if no other Members have further
questions we will adjourn. Thank you very much.
Oh, and we are going to put something in the record. I am
going to ask unanimous consent to put in a letter from
Monitoring Analytics into the record.
[The information appears at the conclusion of the hearing.]
Mr. Upton. And with that, we stand adjourned. Thank you.
Thank you.
[Whereupon, at 11:53 a.m., the subcommittee was adjourned.]
[Material submitted for inclusion in the record follows:]
Prepared statement of Hon. Greg Walden
This is the eighth hearing in our committee's ongoing
Powering America series. Today, we will explore the effects of
financial trading in the Nation's wholesale electricity
markets. I look forward to hearing from our panel of witnesses
to better understand how financial transactions can improve the
efficiency of the energy markets, as well as efforts to protect
consumers from improper trading activity in energy markets.
Electricity is intrinsically different than other
commodities, as electricity is produced and consumed instantly.
Although energy storage technology is becoming more
economically feasible, it is not yet cost-competitive at a
utility scale. The inability to store electricity means supply
and demand must constantly be balanced in real time. In turn,
the instantaneous nature of electricity delivery and
consumption can result in volatile energy prices.
Generators and load serving utilities can protect against
price volatility by fixing the price of electricity for
delivery at a future date by using various financial
instruments such as a Financial Transmission Right (FTR).
Today's hearing gives us the opportunity to learn more about
how these FTRs and other virtual financial transactions fit
into today's electricity markets.
Financial trading within electricity markets is complex and
highly technical in nature. These financial products can
improve the efficiency of electricity markets by increasing
liquidity, mitigating market power, and improving the formation
of energy prices, all of which can result in low-cost
electricity for consumers.
We must balance these benefits against a history that
includes bad actors who have utilized complicated trading
strategies to engage in manipulation schemes in these energy
markets. As I have said many times before, the American
consumer always comes first. Consumers have come to expect
competitive and efficient electricity markets that deliver
affordable and reliable power.
Prepared statement of Hon. Frank Pallone, Jr.
Today we are examining the role financial trading plays in
our Nation's electricity markets. This is a fairly technical,
yet important aspect of the management of energy delivery, and
it is certainly worthy of greater scrutiny.
Under the Federal Power Act, the Federal Energy Regulatory
Commission, known as FERC, oversees electricity markets and the
physical and virtual products traded within them. FERC
specifically authorizes energy market participants' physical
and virtual trading under tariff-based rules and protocols.
Financial tools, which include things like derivatives and
financial transmission rights, can play a positive role in
electricity markets. They do this by providing liquidity, by
helping participants to hedge risk associated with a volatile
commodity and by mitigating market power distortions. This
makes for a more efficient market and, ideally, lower prices
for consumers.
However, financial instruments can also create
opportunities for bad actors to engage in market manipulation -
and that is something that has been and continues to be of
concern to me. I am particularly concerned about large banks
and financial institutions that participate in the market
purely to seek profit. Some of the biggest market manipulation
cases taken by FERC involve big banks like JP Morgan Chase,
which agreed to a $410 million settlement in 2013. Similarly,
Barclays recently settled a market manipulation action brought
by FERC for $105 million, and no longer engages in any trading
transactions.
Electricity is a commodity unlike any other, both in
physical terms and in terms of its importance to our everyday
lives. While I do understand the benefits these financial tools
can provide consumers, producers and transmitters of
electricity, I remain skeptical of the role that pure traders
and big banks play in this market. At a minimum, we must have
strong standards and vigorous enforcement against market
manipulation to ensure reasonable rates for consumers.
I want to thank our witnesses for participating today and
yield the balance of my time.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]