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Archive for August, 2013

Vermont Yankee Plant

The Vermont Yankee Nuclear Generation Plant

Entergy announced yesterday that at the end of 2014 it will close its Vermont Yankee nuclear generating station. Explaining the decision, Entergy’s CEO Leo Denault blamed, among other things, “flaws in the design of the region’s electricity marketplace.”

Only a few weeks ago we talked about Chris Crane, Exelon’s Chief Executive Whiner, who was complaining about flawed markets in PJM, even though those markets are the same ones his predecessors lauded as “robust” only a few years ago. The Sparkspread predicted that other energy company CEOs would soon begin to repeat the term “flawed markets” like a mantra.

And then came Leo Denault from Entergy to prove us right.

Because electric generation companies are getting pounded in the open market, the “flawed market” will now be a trope in the postprandial speeches that Crane, Denault and other energy CEOs love so much. On the plus side, their audience, hovering in that blissful intermediate state between satiety and fatigue won’t hear most of it. But if they did they’d realize that the speaker’s hypocrisy is breathtaking.

Let’s not forget that it was the nuclear plant owners who pushed for deregulated energy markets as a way to maximize the value of their generating assets and avoid the stranded costs that came from a plant whose book value exceeded its market value. The nuke owners were the ones touting free markets for energy and consigning traditional rate-of-return regulation to the dustbin of history. (E.g., Lacy, B., Deregulation – Liberalized Life, Nuclear Engineering International, December 31, 2004, pg. 16). Denault’s predecessor as Entergy CEO, J. Wayne Leonard, had big plans to put Vermont Yankee and a few other nuke stations into a separate merchant power company to take advantage of the market that Denault now finds “flawed.” (Entergy to Create Merchant Nuclear Company, Platts Nucleonics Week, Vol. 48, No. 45, pg. 1, November 8, 2007).

What Crane and Denault are really whining about is the effect of low natural gas prices on nuke operators. Back in 2007, settlements on the Nymex prompt month natural gas contract averaged over $6.86/mmBtus, while for YTD 2013 that average is about $3.68.

That’s a big difference.

The simple truth is that a few years ago Exelon, Entergy and other energy companies saw an opportunity to strip the generation assets out of their regulated utilities and plunk them down into new merchant power companies that could sell the power in a free market for electricity. Those markets were just grand as long as they were making money.

But now that the natural gas glut has torn the bottom out of the electricity market, Chris Crane, Leo Denault and their cohorts can’t stop whining that those markets are “flawed.” They wanted competitive power markets, and they got them.

Memo to Chris and Leo: Not to worry. The effect of natural gas prices on your respective companies is merely one more example of the creative destruction that Schumpeter said was an integral part of the free market you have so long espoused. When you go belly up, someone at the 363 sale will pick the assets up on the cheap (relatively speaking), and make a go of it where you found “flawed markets.”

Flawed markets? I think not. Flawed CEOs, rather.

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In an interesting article on prospective growth in solar energy, Reneweconomy reports a statement by FERC Chairman Wellinghoff that, at its current rate of expansion, solar energy will overtake wind in about ten years, and radically change the relationship between consumers and traditional utilities. Read the article here.

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Blythe Masters, Head of J.P. Morgan’s Commodities Trading

The Justice Department is investigating J.P. Morgan for unlawful manipulation of the electricity market in California and Michigan. This investigation grows out of the same facts that resulted in J.P. Morgan settling charges leveled by FERC three weeks ago for $410 Million. In that settlement J.P. Morgan neither admitted nor denied wrongdoing, but those were civil charges and civil penalties.

If Justice does bring charges, based on a review of the FERC settlement The Sparkspread’s prediction is that someone will become a guest of the feds.

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Transmission_Towers

In 2010, the Midwest Independent System Operator (MISO), sought approval from FERC to impose a tariff on its members to finance new high-voltage transmission lines. MISO called the new lines “multi-value projects,” but their main purpose was to interconnect wind farms in remote areas of the Great Plains.

All states but one in the MISO footprint have renewable portfolio standards (RPS), either mandatory or aspirational. An RPS is essentially a goal that a state sets for itself to have a certain percentage of its electricity requirements met by renewable generation. For example, a state with a “25 by 25” RPS aims to have 25% of its electricity requirements met from renewable energy by the year 2025. The key thing to remember about any RPS is that it is never satisfied by electricity generated by a renewable generation facility. That’s because once the electricity enters the grid, the grid can’t tell the difference between an electron set in motion by a windfarm and another one escaping from a smoke-belching coal plant. An electron is an electron, as far as juice on the wires is concerned.

Instead, RPS requirements are met by the renewable energy certificates (RECs) that are associated with the generation of electricity by a renewable facility such as a wind farm, solar energy facility, or the like. RECs are denominated in increments of one megawatt-hour and are intended to reflect the “green” attributes of the wind or solar farm, such its lack of emissions. This is a significant difference that’s often overlooked. The RECs (the green energy part) can be traded separately from the electricity itself (the brown energy part). A consumer who is “using” 100% or or 50% green energy is actually paying an additional cost for RECs beyond the cost of the regular “brown” electricity he or she buys.

Before 2010, MISO allocated the cost of transmission upgrades and expansions to the utilities nearest the proposed transmission line on the theory that those utilities benefited most from the improvements. But that logic doesn’t always hold for transmission upgrades that interconnect remote wind farms on the Great Plains because those facilities generate far more electricity than is needed in the sparsely populated regions in which they’re located. So in 2010 MISO changed its policy and started to allocate the costs of transmission upgrades among all of the utilities drawing power from its grid based on their relative usage. The result was that most of the costs of these upgrades fell on urban areas, where demand is greatest.

FERC approved MISO’s change in allocation, and numerous parties appealed that decision to the 7th Circuit Court of Appeals (Illinois v. FERC, 2013). In particular, Michigan, which is at the outer edge of the MISO footprint, objected to the new cost allocation scheme because it claimed the amount that it would have to pay would vastly exceed any benefits Michigan would derive from the distant new transmission projects.

Now that might have been Michigan’s best shot, but they also threw in an argument that Michigan law prohibited Michigan utilities from counting towards satisfaction of the state’ s RPS any renewable energy generated by facilities outside Michigan. In answer to this claim, Judge Posner of the 7th Circuit wrote that this Michigan law

“… trips over an insurmountable constitutional objection. Michigan cannot, without violating the commerce clause of Article I of the [United States] Constitution, discriminate against out-of-state renewable energy.”

Posner’s comment has unsettled one of the foundations on which state legislatures have enacted RPSs, namely, a preference for homegrown renewables and the jobs and related economic benefits that flow from a localized green energy industry. What Posner missed though, is the distinction between the electricity generated by the renewable plants outside the state and the RECs associated with that generation. Either Michigan’s lawyers failed to present this argument correctly, or if they did then Posner didn’t grasp it. The Michigan statute in question has neither applicability, relevance or effect on any electricity going in or out of the state on interstate transmission lines, which are federally regulated. But because Michigan’s lawyers used this argument, they invited appellate court commentary on whether geographic preferences or restrictions (meaning in-state preferences or restrictions for the most part) under state RPSs offend the dormant commerce clause of the U.S. Constitution. The express commerce clause provides that only Congress can regulate commerce among the states, and the dormant commerce clause is the negative inference that states may not regulate that trade.

Under the dormant commerce clause, state statutes like Michigan’s that are facially discriminatory are subject to “strict scrutiny,” meaning that the statutes must both serve a compelling interest and be the least intrusive means of achieving that interest with regard to interstate commerce. If a statute fails to meet either of these tests, then the statute is per se invalid under the commerce clause.

Posner failed to consider that every state RPS applies only to electricity consumers within that state. The additional charges for RECs under an RPS are passed through and imposed not on interstate commerce, but on the retail purchase of electricity by residents and businesses within that state. To make that a bit clearer, let’s look at a relatively recent commerce clause case.

Nearly 20 years ago, the U.S. Supreme Court decided West Lynn Creamery v. Healy, 512 US 186 (1994). West Lynn Creamery concerned a Massachusetts scheme to protect and promote that state’s dairy industry by imposing a tax on all milk sold by wholesalers to in-state retailers. About two thirds of the milk sold to retailers in Massachusetts was produced out-of-state, and proceeds of the tax were put into a dairy “equalization fund.” Whenever a state legislature starts using terms like “equalization” or “rationalization,” commerce clause alarm bells should start going off in every lawyer’s head. In-state producers, who were the only beneficiaries of the fund, were entitled to payments based on their proportionate share of milk produced in state. Effectively, the tax was imposed only on out-of-state milk producers. When some out-of-state dealers refused to pay the tax, Massachusetts began proceedings to revoke their licenses to sell milk, and those dealers brought suit for violation of the commerce clause. The court held that the scheme was one designed to preserve local industry by protecting it against the rigors of interstate competition, which is the hallmark of economic protectionism that the commerce clause prohibits.

But unlike West Lynn Creamery, a typical RPS scheme imposes additional costs only on residents of that state, and those additional costs are for RECs, not for the electricity itself. Unlike the plaintiffs in West Lynn Creamery, in the context of an RPS with an in-state geographic preference, no one outside of the state has to pay anything, nor is there any additional cost imposed on the brown energy generated by any out-of-state facility.

Still, because there are only two markets for RECs, namely the mandatory (i.e., RPS compliance) and the voluntary, a geographic in-state preference will have some effect on interstate commerce, and that will be sufficient to trigger a strict scrutiny analysis. Even an indirect effect on interstate commerce may be sufficient to tip the scales against such an RPS under the dormant commerce clause, even if the putative benefits of the law exceed the burden placed on interstate commerce.

Posner’s observation on the commerce clause was not necessary to the 7th Circuit’s decision in Illinois v. FERC, so it can be regarded as dicta (lawyer-speak for judicial fluff), rather than part of the holding in the case. So while the case does not put a complete kibosh (also a legal term of art) on RPSs with in-state geographic preferences, it definitely creates a cloud.

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Talk about rising sea levels. Last fall when Hurricane Sandy hit New York City, parts of the subway system were inundated, and something apparently swam in on the rising tide. As the song says, a helluva town, where the people ride in a hole in the ground. Sharks too. 

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This morning a passenger on the N train to Queens smelled something fishy, and, wouldn’t you know it, there was a shark on the train. Always in search of their 15-minutes of stardom, Big Apple straphangers wasted no time in taking pictures of themselves posing with the deceased shark. Somebody put a cigarette in its mouth and snapped the shark next to a can of Red Bull.  Unfortunately Roy Scheider wasn’t around to tell the conductor that he was going to need a bigger boat.  Or a bigger subway car.

No word yet on whether the shark was on his way to work, though authorities had not yet determined whether the shark was a debt collector or a lawyer.

 

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If utilities can be unlucky, Pacific Gas & Electric must be first in line. It led the charge on California’s original screwy deregulation scheme that ultimately helped drive it into bankruptcy back in the Enron days.

It’s still dealing with the 2010 explosion of one of its natural gas mains in San Bruno, California that killed four persons and destroyed 30-plus homes.

And this morning it was trying to knock down two remaining boiler towers at a decommissioned power plant in Bakersfield, California. The towers had been rigged with detonators to bring it down and the crowd (early birds who came to watch at 6 a.m. on a Saturday morning — they need to have more fun in life) were kept back at a perimeter set up by the demolition contractor.

But pieces of the tower flew past the perimeter and struck a 43-year old man who was watching the explosions, with reports indicating that one leg was severed. Others were injured, but apparently less severely.  Talk about bad news…pieces of steel flying off that tower are functionally indistinguishable from shrapnel or an IED.

Moral of the story: When it comes to anything put together by PG&E, be afraid. Be very afraid.

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When it comes to the production tax credit for renewable energy, Exelon CEO Chris Crane has been playing the common scold for almost a year now. Crane is obsessed with the idea that the PTC is to the wholesale electricity market what kryptonite is to Superman, a major distortive force in electricity markets. (E.g., “Exelon’s campaign against wind power tax credits risks hit to green image,” Crain’s Chicago Business, September 19, 2012; “No new nukes with flawed markets, renewable subsidies, CEOs tell EEI audience,” SNL FERC Power Report, June 19, 2013).

Some believe that if you tell a lie that is big enough, often enough, eventually the public will accept it as the truth. Crane wants to deflect blame for Exelon’s results onto renewables and the PTC, but the fermentation of his fine whine is due to factors he’d prefer not to discuss. Chief among these are persistently low natural gas prices, which set electricity prices at the margin in this market, decreased demand due to a sluggish recovery from the Great Recession, and a $7.9 billion merger with Constellation NewEnergy that has not brought to the bottom line anywhere near the revenues Exelon touted last year. (“Constellation Energy takeover not working out as planned for Exelon,” Crain’s Chicago Business, November 12, 2012). Nor should we discount the as-yet unknown costs of new equipment and maintenance regimes for Exelon’s nuclear fleet required in the wake of the Fukushima disaster.

Before its vaunted merger with Constellation, Exelon put out a “fact sheet” that showed Exelon 2011 revenues of $18.9 billion, Constellation 2011 revenues of $13.8 billion, and (surprise) $32.7 billion in revenues for the combined company. But 2012 revenues came in at just $23.5 billion, which helps explains Exelon’s 41% dividend cut earlier this year and the 30% drop in its stock price after the merger.

The causal relationship between these results and the PTC must be obvious to Crane, if not to anyone else.

And if you visit Crane’s office, there must be a pony around there somewhere.

The energy market is brutally tough for suppliers, but that’s what happens in markets. When Crane transforms ordinary brutal competition into complaints about “flawed markets,” he should take his next letter to shareholders and re-title it “Diary of a Wimpy Kid.” Still, expect Crane and other electricity CEOs to repeat the term “flawed markets” like a mantra, especially when they’re in front of a microphone or within spitting distance of a reporter.

Crane may have forgotten that this is the same wholesale electricity market that Exelon officials were ululating over back in 2002 – 2004 when John Rowe, Crane’s predecessor, led ComEd into the PJM Interconnection, the regional transmission organization that now stretches from the mid-Atlantic states all the way to Northern Illinois. ComEd switched over to PJM’s grid in May 2004, and ComEd said then that its integration into PJM would give its customers “access to the strongest wholesale electricity market in the country.” (“Commonwealth Edison successfully integrated into PJM,” PR Newswire, May 1, 2004).

So what’s different between 2004, when Exelon proclaimed the PJM market the best in the country, and now, when CEO Crane cries to the press and EEI audiences that these same markets are “flawed”? Nothing, except market electricity prices were a heck of a lot higher back in 2004. But when in doubt, blame it on renewables.

Far from being some sort of new distortive power in an otherwise pristine wholesale power market that Exelon used to enjoy, the PTC came in with the Energy Policy Act of 1992. Congress has been renewing it, albeit spasmodically, ever since. It was as much in effect in 2004, when Exelon loved the market (and prices were higher) as it is now when Exelon hates the market (and prices are lower).

But Crane needed a whipping boy and the PTC was at hand. He needs to hide how badly Exelon is being beaten in the Illinois competitive electricity market. The numbers in the Illinois wars of municipal aggregation tell Exelon’s sorry tale.  Exelon’s biggest municipal aggregation deal to date is Evanston, and it has won aggregation bids for an additional eleven smaller municipalities. So, out of a total of more than 675 municipal aggregations that have occurred over the last few years, Exelon has won twelve (12) of them. That’s right, twelve. The PTC didn’t do that. Exelon’s uncompetitive pricing did that.

When CEOs complain about destructive competition, it’s usually their own company that’s getting destroyed. Wall Street might be stupid enough to buy Crane’s story, but Chicago won’t.

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