Traders: PJM Delay, Secret Support Could Result in Pa. Tax
PJM financial traders, who have been complaining for years that RTO rule changes and FERC enforcement have threatened their livelihood, now say they fear that Pennsylvania lawmakers may target them in efforts to close the state’s budget gap.
They say the situation might be different if PJM officials — who knew about a potential tax on virtual trades for nearly a month before bringing it to traders’ attention — had given them enough notice to develop a comprehensive response. Instead, they contend, PJM secretly supported the idea, then withheld that information when alerting stakeholders just weeks before the state’s budget deadline.
PJM has denied supporting the tax and says it followed its normal procedure in the matter.
Traders are hoping to head off the proposed tax this week, as state lawmakers attempt to close a $2.2 billion budget hole that has Standard and Poor’s threatening to downgrade the state’s already low credit rating.
The incident has raised questions about when PJM should alert its membership about interactions with other organizations. The RTO currently has no rules on the subject and says that, up until now, stakeholders have always trusted its judgment in such matters.
The controversy also marks another chapter in an ongoing feud between PJM and Shawn Sheehan, president of XO Energy, who has accused RTO staff of bias against financial-sector stakeholders. (See PJM Board Disputes UTC Trader’s Accusations.) Sheehan also is fighting in federal court over FERC’s attempt to collect $42 million in fines and profits for allegedly risk-free up-to-congestion (UTC) trades. (See Traders Deny FERC Charges; Seek Independent Review.)
On June 26, Sheehan sent a letter to PJM questioning its “independence and neutrality” and complaining that RTO officials only belatedly informed traders of the proposed tax. “Virtual transactions have been under attack — throughout the PJM stakeholder process as well as by physical asset owners, load-serving entities, the Independent Market Monitor and now PJM,” he wrote.
Sheehan’s letter cited PJM’s proposals to impose deviation charges on UTCs and reduce the number of biddable locations for them before turning to what he said “appears to be a coordinated effort between PJM senior staff and members of the Pennsylvania state legislature that would result in a gross tax on virtual transactions in PJM.” (See PJM MRC OKs Uplift Solution over Financial Marketers’ Opposition.)
PJM, which said it has consistently opposed the tax proposal, said it was first contacted in January by Pennsylvania legislative staffers seeking general education on its markets.
CFO Suzanne Daugherty told RTO Insider that she receives “dozens” of similar inquiries each month. Alerting stakeholders to all those inquiries would create an “unmanageable” volume of information, she said, so stakeholders have always trusted the RTO’s judgment on what needs to be disclosed to them.
“It is actually very common for PJM to get requests at the state level,” Daugherty said. “We don’t always know that when we’re providing that education, why we’ve been asked for it or what the information might be used for.”
PJM was asked to provide the same information in May but with state Department of Revenue representatives in the room. It then became clear that the state was looking at PJM’s markets as a potential source of tax revenue, Daugherty said.
According to Daugherty, PJM officials told the staffers the RTO opposed any new taxes on its membership and presented them with information — such as potential jurisdictional issues — to support their position. “We thought there might have been some possibility that PJM’s points, along with any other discussions that might have occurred in Harrisburg, had dissuaded them from pursuing any additional tax,” she said.
Daugherty said the issue was then discussed at PJM’s Finance Committee meeting on May 15, although the agenda for the meeting doesn’t list the topic and the RTO has not posted any minutes. Three stakeholders who attended the Finance Committee meeting — GT Power Group’s Dave Pratzon, Gary Greiner of Public Service Enterprise Group and Pennsylvania Assistant Consumer Advocate David Evrard — confirmed the issue was discussed there.
Pratzon said the issue came up when he asked PJM to provide an update. He said he was not certain when or how he first learned of the proposal.
Evrard said PJM reported that it gave “Pennsylvania officials reason to believe that a tax on physical transactions was not feasible, but that whatever the rationale for that position was, it did not apply equally to virtual transactions.” He also confirmed that PJM indicated it was not advocating for the tax.
However, legislative staffers returned in mid-June, announcing they had narrowed their interest to a potential tax on virtual financial transactions, such as UTCs. That’s when Daugherty began alerting financial stakeholders, including attorney Ruta Skucas, who represents the Financial Marketers Coalition.
Skucas said she received a call from Daugherty on June 13 and immediately alerted members of the coalition, including Wesley Allen of Red Wolf Energy Trading and XO General Counsel Carey Drangula. XO arranged a call the following day with Daugherty, who urged the company to contact state legislators “to try to put a stop to this,” Sheehan said in an interview. XO set up meetings with state legislators for the following week to oppose the idea.
Tracy Lawless, a government affairs adviser for XO’s lobbying firm, K&L Gates, said the idea began in the office of Senate Majority Leader Jake Corman (R), whose general counsel is Rik Hull, former counsel to state Public Utility Commissioner and FERC nominee Robert Powelson.
Lawless said the idea was delegated to Sen. Ryan Aument (R), a member of the Senate Finance Committee, whose chief of staff, Jake Smeltz, served as president of the Electric Power Generation Association between 2010 and 2014. Smeltz “was tapped to investigate various revenue ideas based on his industry experience,” Lawless said.
Through Aument’s receptionist, Smeltz declined to comment.
In his letter, Sheehan said that he was told that state officials had determined that although physical transactions could not be taxed — presumably because of federal jurisdiction over wholesale power sales — “virtual transactions could be subject to a levy because they are allegedly only transacted in Norristown, Pa., and allegedly do not have a direct connection to the physical grid.”
Sheehan said members of his company met with members of the legislature the prior week and “were surprised to learn from professional staff that the proposed tax was supported by PJM. There was also some suggestion that a tax on virtual transactions could help fund potential nuclear subsidies.”
If some senators remain interested, they seem to be on their own, according to tax opponents. “The House [of Representatives] wants nothing to do with supporting a virtual transaction tax,” Drangula said, relaying information she said she received from XO’s lobbyists.