Beware Unbridled Enthusiasm—Recent FERC Settlements Hold Lessons for Aggregators
In more than one RTO market, aggregators may find themselves in the position of making capacity offers for future delivery periods based on projections of how much aggregated capability they will have available in the future. This presents somewhat of a dilemma, as there are financial incentives to project aggressively.
COMMENTARY
Capacity revenues may play an important role in the overall economics of the business. Depending on the program terms and customer agreements, these revenues may also impact the payments the aggregator makes to existing customers or that it can offer to new customers for their participation. It would also be understandable if the aggregator is generally optimistic about growth and believes in its product and business model. But what happens when business doesn’t develop as expected and the aggregator can’t deliver?
Just as it led to the downfall of cockeyed optimist Billy Mumphrey, unbridled enthusiasm bears risks for aggregators offering demand response or other aggregated products into the regional electricity markets. The Federal Energy Regulatory Commission’s (FERC) recent approvals of settlements of the Office of Enforcement’s investigations relating to the demand response (DR) offers of Leapfrog Power, Inc. and OhmConnect, Inc. present some mild examples of how this can go wrong.
In both of these instances, the settling companies participated in the California Public Utility Commission’s Demand Response Auction Mechanism (DRAM) Pilot Program. Under this program, DR providers contract with Load Serving Entities (LSEs) to provide a given amount of DR. Each month, the DR provider reports to the LSEs how much DR they will provide 90 days later, and these amounts are able to be used by the LSEs to satisfy their Resource Adequacy obligations.
In exchange, the DR provider receives a Resource Adequacy Availability Incentive Mechanism payment. This is essentially a type of capacity payment.
As part of the DRAM, DR providers are also subject to a must-offer requirement with CAISO and therefore must bid the same DR into the CAISO day ahead energy market each day.
According to the publicly available Commission-approved settlement agreements relating to these two matters, FERC Enforcement determined through its non-public investigations that these two entities on a number of occasions made day-ahead offers into CAISO which they could not possibly have fulfilled if called upon due to the offers exceeding the cumulative total metered load of all of the individual customers whose potential DR was aggregated, i.e. even if all of the DR provider’s registered customers had completely curtailed down to zero electricity use, the DR provider still could not have provided the amount of DR they bid into the CAISO day ahead market.
FERC Enforcement determined that this behavior violated a CAISO tariff provision requiring bids for energy to be available and capable of performing at the levels specified in the bid.
The approved disgorgement amounts suggest that the profits from Leapfrog and OhmConnect’s allegedly violative behavior were approximately $46,000 and $9,000, respectively.
It Could Happen to You
This type of situation can be faced by any DR or distributed energy resource (DER) aggregator in the position of projecting anticipated business development for the purpose of participating in a capacity-type market or program. As a growing, evolving market participant category with relatively low financial barriers to entry compared to traditional generation, resource aggregations are likely to be an area of focus for Enforcement in the coming years. This is particularly so where the relevant market participation models are newly developed or are undergoing changes.
There are really only two overarching explanations for how this can happen. Either the aggregator made a reasonable and good-faith projection that didn’t bear out, or it overstated the volume of customers it would sign up in order to secure higher capacity revenue. Among other important evidence, the analysis performed by the aggregator to develop its projections will be of great interest to Enforcement as it works towards conclusions on whether the behavior violates the rules and, if so, the level of culpability.
FERC investigations are not limited to evaluating compliance with particular specified rules; an investigation can implicate multiple rules and obligations, which can change over the course of the investigation as additional information is gathered. While these two settlement agreements speak in terms of violation of a particular CAISO tariff provision, FERC Enforcement almost certainly considered whether the behavior constituted market manipulation or a violation of the duty of candor, which could present alternative routes for prosecution. It should also be noted that most ISOs have some form of “resource offers should reflect capability” tariff requirement.
Planning Ahead
Aggregators should exercise appropriate diligence when performing analyses that lead to offers of energy, capacity, or other market products. They should consider engaging counsel for advice on risks of or improvements to those analyses. Finally, when things don’t work out as projected, aggregators should: (1) consult counsel if contacted by a market monitor or FERC Enforcement (including the Division of Analytics and Surveillance); and (2) seek advice on whether it might be appropriate to prepare and submit a self-report, which might head off a costly, risky, and disruptive investigation by FERC Enforcement.
—Maxwell Multer, a Charlotte, N.C., and Washington, D.C.-based counsel with Bryan Cave Leighton Paisner, helps clients realize their energy-related business goals with strategic and transactional advice, as well as representation in regulatory and enforcement matters before the Federal Energy Regulatory Commission, state utility commissions, and other regulatory authorities. He previously served as an attorney-adviser in FERC’s Office of Enforcement as well as in-house counsel at a large combination utility.