Lake Erie energy disputes could upset green power growth

Nature has provided a potent way of easing greenhouse gas emissions through the generation of wind power in the Great Plains to displace Eastern plants that run on Appalachian coal.

But nature has also thrown a massive obstacle in the way of these power flows -- Lake Erie.

Great Plains wind power moving toward the lake will choose to flow either clockwise, through Michigan and Ontario toward New York, or counterclockwise, south of Lake Erie through Ohio and Pennsylvania, depending on which set of power lines around the lake is less congested at any moment, offering less electrical resistance.

This willful flow of power is at the root of an unsettled dispute before the Federal Energy Regulatory Commission involving the four grid operators that oversee power shipments in New York, Canada's Ontario province, the central Midwest and the southern side of Lake Erie.

Major differences among these control organizations over the pricing of power wheeling around the lake -- reflecting in part the self-interest of the major power companies in each region -- frustrates the creation of a unified policy of managing power flows through the region, FERC filings show.


Experts say the "seams" issues at the borders of this Balkanized system could raise obstacles to the climate policy goal of massively increasing wind power from the nation's middle to Eastern population centers. Seams disputes can undermine inter-regional agreements on paying for new long-haul "green" power lines, threaten reliable operations, and lead to charges of pricing violations that corrode public confidence in electricity markets, experts say.

FERC has issued an ultimatum to the U.S. grid operators around Lake Erie to reconcile their differences and fix, once and for all, the unscheduled, uncontrolled circumnavigation of electricity around Lake Erie that is known as "loop flow." FERC gave the parties six months to strike a deal. Whether the operators will, and what FERC would do if they don't, are unsettled questions.

Electrons without borders

The hazards of controlling electricity flows around the 1,000-mile Lake Erie loop were cited in investigative reports of the 2003 Northeast blackout. While many reliability issues have been addressed since then, disputes over prices and profits linger on, FERC's filings show.

"States just care about what the rates are for their people," said Linda Stuntz, a Washington, D.C., attorney who chaired a 2008 Energy Department study of the grid, "Keeping the Lights On in a New World." The loop flow issues "show the realities of the electrons not respecting the international or state boundaries. It is very difficult to work out."

The case in question, FERC Docket ER-1281, arises from a complaint last year from the New York Independent System Operator's market monitor alleging that a small number of energy traders it didn't name were manipulating the market or violating tariff rules in the way they scheduled purchases and sales of power around the lake.

By far the most common schedule covered power purchased hourly in western New York that was to travel counterclockwise over designated transmission line paths through Ontario and Michigan into the PJM Interconnection system, the grid section that runs from Chicago south of Lake Erie into Pennsylvania and New Jersey.

In fact -- and contrary to what the schedules called for -- 80 percent of the power flowed clockwise directly into PJM through a New York-Pennsylvania transmission line link, following the path of least resistance at the time when the power was moved.

This unplanned-for loop flow increased congestion on lines carrying power from Ontario and western New York into New York City. Greater transmission line congestion led to higher wholesale power prices in New York, and the New York ISO estimated that transactions it challenged caused nearly $100 million in higher wholesale electricity charges in the first half of 2008. New York demanded refunds.

No market manipulation, FERC finds

FERC agreed last year to the New York ISO's request to ban the New York-Ontario-Michigan-PJM routes in favor of the more direct New York-PJM paths available. But in an order this July, it concluded that the routing practices that caused the higher prices were not due to market manipulation, as FERC defines it. No refunds were called for, it said.

The fundamental problem was a difference in the way the New York ISO and PJM set prices on power wheeling through their systems, FERC's Office of Enforcement concluded in a June 10, 2009, investigative report that the commission made public in July.

A policy change by New York ISO in 2007 led to a situation where the hourly price of electricity purchased at the New York-Ontario border became significantly lower than at the New York-PJM border in Pennsylvania, FERC's staff reported. In one hour on May 26, 2008, the price at the New York-Ontario gateway was $80 a megawatt-hour, while the New York-PJM price was $100, FERC reported last year.

Energy traders and utility marketers detected this arbitrage opportunity at the end of 2007 and began to schedule more trades through the New York-Ontario transmission gateway, locking in the arbitrage profit with simultaneous buy-sell orders.

The shift quickly became a flood. Before FERC blocked the particular New York-Ontario shipments in July 2008, nearly 4 million megawatt-hours of power were scheduled in that direction.

FERC staff noted that Lake Erie loop flow -- the difference between scheduled and actual power movement -- has been historically volatile, swinging by as much as 1,000 megawatts in a few hours.

Loop flow has been predominantly counterclockwise around the lake, through the less populated Ontario corridor, FERC said. (Loop flow is also a function of the number and size of transmission lines along the lake's north and south sides). That tendency helps New York, because it reduces congestion -- and costs -- for power moving eastward and southward through the state toward New York City.

But that directional tendency raises congestion and power costs within PJM and the Midwest Independent Transmission System Operator (MISO), which controls Michigan power flows, FERC's staff added.

Initial power flip 'remains a mystery'

Although aspects of FERC's investigation continue, the staff concluded and the commission agreed that power marketers were taking advantage of price spreads that resulted from the different policies PJM and the New York ISO employ, reflecting the interests of power companies that make up their membership.

"The evidence strongly suggests that the market participants placed these trades based on the economics of their price points, rather than on considerations of how the power would flow" or how congestion or pricing would change as a result, the staff said.

The grid controllers' ability to control and monitor actual power flows in real time is critically limited, as FERC's staff report documents. "Even NYISO, with all the tools at its disposal, conceded that 'it is difficult to predict future circulation patterns [for power flows] with accuracy.'"

The historic counterclockwise loop flow tendency flipped in the opposite direction in the last 10 days of December 2007 and persisted until FERC shut down the New York-Ontario transactions last year.

"The cause of the initial flip remains a mystery to NYISO," FERC's staff said. In fact, NYISO couldn't deduce exactly what was happening until it ran complex mathematical power flow studies, the staff added.

The operational blind spots are compounded by the control organizations' unwillingness to share details about their power flow contracts with each other and by power traders' insistence that more visibility into the trading would hurt them competitively, as FERC's report describes. Real-time transaction information "is something that as a general rule, organizations have proven somewhat unwilling to share," said a PJM executive who declined to be named because of ongoing negotiations to resolve the dispute.

'Mountain clan' feuds

The complexity, secrecy and uncertainty about real-time power transactions -- and the memory of Enron Corp.'s predatory "Fat Boy" and "Ricochet" trading schemes -- invite suspicions of fraud or misconduct when prices jump, as wholesale prices did in New York last year. PJM market monitor Joseph Bowring Jr. noted last year that he saw a potential for "gaming" loop flow transactions.

The National Association of Regulatory Utility Commissioners has warned of a possible political backlash against climate policies if electricity prices escalate sharply. That may become particularly likely if suspicions about power trading are rampant, as recent power pricing controversies in Connecticut and elsewhere show.

Meanwhile, the control organizations are also at odds about a potential technical remedy to loop flow.

New York ISO wants FERC to require the activation of special transformer units called phase angle regulators (PARs) that are located on the Michigan-Ontario grid border. Settings on PARs units can be changed to vary electrical resistance and thus control power flows on those circuits, and New York ISO says these units are key to limiting unscheduled loop flow around the lake.

The PAR units, however, are owned by the International Transmission Co. (ITC) in Michigan, which is in the midst of a negotiation with Ontario and MISO over the future control of the units. The Lake Erie loop flow is a regional issue that will require coordinated operations by all the companies involved, and the ITC PARs can't solve the problem alone, an ITC spokesman said.

The Energy Department oversees these negotiations, and ITC says it doesn't want FERC to step into the issue. Moreover, ITC doesn't want to pick up the entire tab for fixing the problem, it told FERC. ITC expects to spend about $33 million to acquire and install two new PAR units at the Michigan-Ontario border. "NYISO's request ... makes clear that it expects to be a major beneficiary of the PARs. Simple fairness, therefore, dictates that it should pay a corresponding portion of the costs," ITC said in a FERC filing.

The Lake Erie power flow problem has so far defied solution, one grid executive said. "The history of this goes back many, many years, unfortunately."

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