25 Jul 2013

Two FERC settlements illustrate attempts to ‘game’ demand response programs

Written by Jim Pierobon

Two settlements at the Federal Energy Regulatory Commission (FERC) made public this year involving large civil penalties illustrate how the market for demand response (DR) services could be ‘gamed’ by artificially inflating normal levels of power consumption.

In the most recent settlement, the FERC reached a consent order June 7 with the Enerwise Global Technologies unit of Comverge, a demand response services provider. Enerwise agreed to pay a civil penalty of $780,000 and return

Oriole Park at Camden Yards empty during day CREDIT Skyscrapercity DOT com

Turning the lights on at Oriole Park at Camden Yards in Baltimore during a September 2010 power emergency — when no event was taking place on the field — resulted in a $780,000 fine paid by Comverge. CREDIT: Skyscrapercity.com

$20,726 plus interest in “unjust profits” for wrongly claiming to grid operator PJM Interconnection (PJM), on behalf of the its client, the Maryland Stadium Authority (MSA), that it reduced the baseline electricity usage in 2009 and 2010 at Oriole Park at Camden Yards (photo, right).

In the other consent order, Rumford Paper Co. in western Maine agreed March 22 to pay $3 million to settle a civil penalty of $10 million and the return of about $2.8 million in profits. That settlement showed the company “artificially inflated” its baseline power needs for six months beginning in July 2007 for a program run by the Independent System Operator in New England (ISO-NE).

The Rumford settlement payment was reduced after the paper mill and its parent company, NewPage Corp. — faced with a potentially crippling penalties — filed for protection from creditors under Chapter 11 of the federal bankruptcy code.

Taken together, these settlements, along with at least three other demand response cases pending at the FERC, offer a growing body of evidence of how companies could try to take advantage of demand response programs that earn themselves — and their customers — money during calls by power grid operators to reduce electricity consumption. As a result, electricity consumers in bulk pay for hundreds of thousands, if not millions, of dollars for demand response that never occurred. Meanwhile, the facility and its contractor(s) think they’re scoring easy money.

How extensive are activities to establish false ‘baseline’ demand for electricity?

There are, apparently, a handful of ways to inflate a facility’s normal, or baseline, demand for power. It depends on the details of the DR program. Either way, when the call to cut load comes, that facility continues to draw electricity at a rate the grid operator believes a significant reduction, when in fact it is actually close to the normal level. It begs the question whether actions such as these are not occurring in regional power grids throughout the U.S.

So we’re learning on the fly that establishing a legitimate and verifiable baseline is critically important to demand response programs functioning as they are envisioned — and for ratepayers as a whole to get value for the money they, in effect, are paying. Without a legitimate baseline, grid operators such as ISO-New England  and PJM Interconnection cannot determine if bonafide demand response resources are available, as well as, what the value for the demand reduction should be.

While it’s a bit of a stretch, these settlements hark back to how California wrestled with its newly competitive power supply market in 2000-2001. We all know now how Enron manipulated wholesale power supplies leading to blackouts and the company’s spectacular demise within a year and apparently the death of CEO Kenneth L. Lay days before he was to be sentenced to federal prison for his roles in overseeing the market manipulations.

Rumford Paper CREDIT Jose Leiva - Sun Journal, March 26, 2013

The Rumford paper mill in western Maine is a major player in New England’s demand response markets. CREDIT: BangorDailyNews.com

Rumford, at the recommendation of its consultant, Competitive Energy Services (CES), intentionally ramped down power consumption at its main paper mill (photo, left) only to purchase replacement energy for $120,000. That’s a fraction of the award it would falsely receive under ISO-NE’s  “Day-Ahead Load Response Program” (DALRP) at the time. The swap did little, if anything, to relieve congestion on the regional grid.

Grid operators like PJM and ISO-NE coordinate the flows of electricity in their regions. They are the last resort to avoid regional power outages during surges in demand, typically during the summer and early fall.

‘People have attempted to cheat’

John Shelk, president of the Electric Power Supply Association,  asserted on the National Public Radio talk show hosted by Diane Rehm Tuesday, July 23 that “These temporary reductions in demand are problematic because the program is designed to pay people to reduce power below what they otherwise would have used.  You’re trying the prove a negative. What would they have used if they weren’t paid to reduce their demand?”

Shelk did not mince words: “The commission (FERC) has prosecuted these cases where people have attempted to cheat. The important point is to remember is demand response is not free. Residential consumers are paying the Wal-Mart’s of the world to reduce demand. We have to make sure that that’s actually happening  . . . (that) consumers are getting value.” On the NPR transcript here, Shelk’s comments above begin at 10:32:44.

Engineers with Enerwise / Comverge, with senior management’s knowledge, executed steps to turn ON the lights at the baseball stadium to create false demand that it was then paid to reduce in compliance with the three 2010 PJM orders. One of the many issues which surfaced during a FERC investigation: there was no event at the stadium and thus no lights were needed on the field.

Enerwise was more complicit by representing to PJM that it the stadium authority had the capability to meet about 4.6 megawatts of its own demand by turning on two on-site power generators and drawing on ice storage equipment, also on site, thereby relieving some stress on the grid. The problem here: the two generators were not able at the time to operate simultaneously as Enerwise and the Maryland Stadium Authority said they would.

FERC determined “Enerwise was paid for 1.8 MW of load reduction that MSA (stadium authority) could not have reliably provided in an emergency declared during the 2009/2010 PJM Delivery Year. Enforcement determined that Enerwise received, less payments to MSA, unjust profits of $20,726.”

PJM noted the irregular electricity usage by the stadium authority and gave the FERC the head’s up in November 2010. A formal investigation ensued, leading to last month’s settlement. A spokesman for Comverge said the company had no comment on the settlement.

Perhaps because of this exposure to alleged manipulations, the so-called “Interruptible Load for Reliability”  program created by PJM has since been terminated. Asked to explain why, PJM spokeswoman Paula DuPont-Kidd did not comment after a two-day wait for a response.

ISO-NE tipped off FERC about Rumford Paper’s activities in March 2008. The upshot in these types of case: probing and then formally investigating alleged manipulations can easily stretch three or more years.

While in the June 7, 2013 FERC-Enerwise settlement and the March 22, 2013 FERC-Rumford settlement both state the companies neither admitted nor denied that it violated the Commission’s Anti-Manipulation Rule under the Federal Power Act, they serve as a warning of possible attempts to come. At the same time, it could provide a window into shortcomings of ‘early’ demand response programs and how they’ve been re-designed to more effectively — and accurately — manage demand responses during heat waves.

FERC said Enerwise cooperated fully during the investigation. That hasn’t been the case with Competitive Energy Services (CES), the Rumford contractor. FERC conducted a separate investigation of CES’s role and issued this show-cause order. The order calls for CES to pay a civil penalty of $7.5 million or an amount consistent with the Federal Power Act and the return of $166,800 profit.

CES, in a statement, said “our customer did nothing different from scores of other New England entities who participated in the ISO-NE demand response program, only two of whom are being investigated.” The other target is another CES client, Lincoln Paper in Lincoln, Maine. A show cause order against Lincoln is here. It calls for a $4.4 million civil penalty or an amount consistent with the Federal Power Act and the return of $379,000 in profits.

Lincoln Paper’s response asserts “there was no meaningful guidance in the DALRP Rules, ISO-NE tariff, or FERC Orders regarding how to do so” and that “Lincoln’s baseline-setting methodology was legitimate and economically sound. It in fact closely tracked the basic architecture of FERC’s own Order No. 745 on demand response compensation.”

Yet another show-cause order has been filed against CES’ chief executive officer, Richard Silkman calling for imposition of a $1.25 million civil penalty or an amount consistent with the Federal Power Act.

In a statement, CES blamed the confusion over alleged wrongdoings to a “fatally flawed design . . . “We look forward to a transparent process that will yield a fair and open hearing before an impartial federal court.”

Similar to PJM’s actions, the ISO-NE’s “Day-Ahead Load Response Program” (DALRP) also was terminated. According to ISO-NE spokesperson Ryan Lacey, it was “replaced with a similar mechanism allowing DR resources to participate in the market in a similar way.”  Lacey would not comment on the Rumford settlement.

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