Green Mountain Energy Seeks Waiver of Penalty for "Inadvertent" Withholding of New York Capacity

Green Mountain Energy Company has petitioned FERC for a limited, one-time waiver of a New York ISO tariff provision requiring penalties for the withholding of capacity, after Green Mountain said that it, "inadvertently withheld a small amount of capacity from the NYISO installed capacity ('ICAP') market," in May and June 2011.

Specifically, Green Mountain failed to offer 20 MW over a two-month period, actions for which the NYISO is seeking a penalty of $387,000.

"Given the punitive nature of the penalty, and the inadvertent nature of the underlying offense, Green Mountain respectfully requests that the Commission grant a limited, one-time, waiver of the penalty provisions of the NYISO's tariff."

In support of its petition, Green Mountain said that it and its affiliates have: (1) reported the potential violation to the Commission's Office of Enforcement as soon as it was discovered; (2) seen no financial gains from the error (Green Mountain said that it and its parent company lost money as a result of the mistake); and (3) installed internal controls to ensure that this behavior does not occur again.

Green Mountain said that it sells renewable power to more than 300,000 commercial and residential customers, with the majority in Texas and a small but fast-growing number in the Northeast, particularly New York City.

In New York City, Green Mountain parent NRG Energy owns a total of 1,198 MW of capacity through its affiliates Arthur Kill Power LLC and Astoria Gas Turbine Power LLC.

Under NRG's management and operation Green Mountain as an, "independent, stand-alone business with a distinct retail business, within the NRG family of companies," Green Mountain informed FERC that, "the commercial relationship between NRG Power Marketing LLC (PML) and Green Mountain is an 'arm's length' relationship, where PML and Green Mountain transact capacity at market prices."

"However, as a result of this commercial separation, Green Mountain inadvertently failed to offer 11.6 MW into the May 2011 ICAP Spot Market Auction and 9.7 MW into the June 2011 ICAP Spot Market Auction," Green Mountain said.

"This inadvertent failure to offer did NOT involve any intent on the part of Green Mountain or PML to manipulate the NYISO market to the financial benefit of the NRG family of companies as evidenced by the fact that both Green Mountain and PML (and thus NRG as a whole) lost money," Green Mountain said.

Specifically, Green Mountain said that it lost the value of the physical capacity it had purchased, but then neglected to bid into the auction (effectively rendering those purchases worthless). "Additionally, PML's hedged capacity position within New York City was such that it also lost money as a result of the small increase in capacity prices caused by Green Mountain's mistake," Green Mountain said. Precise amounts of financial harm were filed confidentially in the companies' self-report to FERC's enforcement office.

Green Mountain cited FERC precedent in which the Commission granted a waiver of penalties for a capacity provider which did not bid its installed capacity into the monthly capacity spot auctions as a result of "inadvertent, ministerial errors."

Green Mountain said that the mistake resulted from the following events, which are instructive to Green Mountain's capacity strategy:

"First, the new affiliation of Green Mountain and NRG imposed a new 'must offer' obligation on Green Mountain for any physical capacity it did not use to meet its load position. The requirement to offer unused capacity into the market was new to Green Mountain and an internal program envisioned at the time of the acquisition governing this type of situation broke down.

"Second, prior to the acquisition, Green Mountain managed its New York capacity obligations through a number of contracts with an unaffiliated third-party energy manager. Post-acquisition Green Mountain entered the ICAP market on its own behalf effectively for the first time. Green Mountain intended to purchase capacity products from its affiliate, PML in order to meet the capacity obligations assigned by the NYISO each month. Attorneys at NRG worked with Green Mountain trading personnel to develop a strategy whereby Green Mountain would bilaterally procure a quantity of physical capacity from PML that was less than its total capacity supply obligation. The plan was that Green Mountain then would hedge its remaining capacity supply obligation through bilateral financial transactions tied to the actual capacity clearing price. This way, Green Mountain: (i) was protected against ICAP price volatility and (ii) Green Mountain would never be long in the NYISO physical capacity market, and thus never be in a position of having to make physical sales into the NYISO market. Critically, a financially hedged capacity position is self-actuating at the end of the month, with Green Mountain receiving or paying money to the financial counter-party, depending on whether the hedge is in or out of the money. A long physical capacity position, however, requires an additional step of bidding that capacity into the market – a step which did not happen in May and June.

"Third, the head of Green Mountain's capacity purchases, and the person that was most involved in developing this strategy for Green Mountain, left the company before the strategy was completely implemented, and shortly before bids and offers were due into the NYISO for the May capacity auction. The loss of this key institutional knowledge directly contributed to Green Mountain's inadvertent failure to offer its excess physical capacity into the May and June capacity markets.

"Fourth, because the NYISO's processes for assigning load obligations are complicated, and load true-ups are conducted over a series of months, it is impossible for Green Mountain to precisely define its total capacity exposure for each month. Specifically, the NYISO engages in a multi-month true up process, where load serving entities receive an 'assigned excess' amount that they are required to fill, as well as true-ups related to retail load switching. This helps explain why Green Mountain did not immediately recognize that having a small amount of excess capacity at the end of the month was improper.

"Finally, PML and Green Mountain are each separate members of NYISO, each with its own NYISO portal not available to each other. PML was not able to see that Green Mountain was long capacity and advise Green Mountain to make the excess sale," Green Mountain said.