FERC Filings
REPLY COMMENTS OF EPSA ON RTO NOPR
RTOS MUST BE SEPARATED FROM POWER MARKETS
Commodity Prices Should Not Be Set By Transmission Operators
In the NOPR, the Commission states: "a properly structured RTO will be an entity that is independent from all generation and power marketing interests, and has exclusive responsibility for grid operations, short-term reliability, and transmission service within a region." This vision, with which EPSA concurs, is fundamentally incompatible with an RTO-run power exchange. For this reason, the Commission should modify its existing proposal to ensure that RTO operations are separated from any power markets that might exist or emerge<sup>7</sup>.
The fundamental problem with RTO involvement with power markets was dramatically illustrated by a recent interview with Philip J. Pellegrino, chief executive officer of ISO New England, Inc. When power prices hit $1,600 a megawatt-hour during a June heat wave, Mr. Pellegrino stated, "If we allow the markets to clear at that level, some participants would go bankrupt. You’d have a massive transfer of wealth from one set of market participants to another … which in the final analysis the ISO cannot permit to occur."<sup>8</sup> Leaving aside the question of whether or not significant "wealth transfers" in periods of shortage set the proper market signals<sup>9</sup>, prices have (or, more importantly, should have) nothing to do with grid operations. Mr. Pellegrino and his colleagues at ISO New England should be focused on ensuring the transmission operations are reliable, that transmission service is provided on a comparable basis for all market participants consistent with the Commission’s regulations and that the ISO’s Tariffs are fairly enforced. They should be indifferent to the price at which the commodity they transport clears the market.
RTO Should Promote, Not Control, Markets
To achieve the Commission’s goals of robust bulk power markets, the regional transmission grid operator (regardless of its organizational form) cannot be in the position to choose winners and losers in the commodity business. As discussed further below, if the ISO is uniquely positioned to identify market flaws, it should do that to the appropriate regulatory entities, without market intervention in its own name. In addition, RTOs should be strongly encouraged to develop and promote market oriented solutions to any problems they identify. Rather than automatically assuming that heavy-handed price caps or after-the-fact price adjustments are the tools of choice, RTOs should be required to pursue alternatives designed to eliminate barriers to market entry, encourage maximum market participation, allow services to be provided bilaterally or to be self-provided, eliminate unnecessary risks and otherwise focus on encouraging markets to function.
This summer’s experiences at ISO New England are not unique. Last summer saw market problems responded to in a similar manner in California, where the ISO imposed "temporary" price caps on certain ancillary services, which it is now seeking to extend. To allow the ISO to intervene in bulk power markets, whether setting prices, adjusting bids, or otherwise manipulating market outcomes, will ultimately frustrate the Commission’s vision of a robust competitive bulk power market. The Commission needs to address this issue now and make a clear statement in the Final Rule that RTO responsibility will be in the transmission area, not in the operation of power markets.
This issue was raised in the comments of the Pennsylvania Public Utility Commission (PaPUC), which stress the need for power exchanges to create price transparency. However, while arguing that power exchanges are needed, the PaPUC states that control of the PX "need not rest with the RTO." (PaPUC Comments, page 9). This is consistent with EPSA’s position that the market, not regulators, should create the market exchanges needed to support competition. Likewise, the Bureau of Economics of the Federal Trade Commission (FTC) argues that, with respect to ancillary service markets, having the RTO serve as supplier of last resort does not require the RTO to be the sole buyer of ancillary services. The FTC urges the Commission to consider (EPSA would recommend require) "arrangements in which the RTOs primary role is to provide a market mechanism for generators to acquire such services for themselves." (FTC Comments, page 23.)
7. As a general matter, power exchanges improve liquidity and price transparency, both of which are beneficial to competitive commodity markets. However, to the extent market participants desire these services, power exchanges should be market driven, not created by regulatory directive and operated by the RTO.
8. Wall Street Journal, August 25, 1999
9. In a paper prepared in the wake of last summer’s price spikes, EPSA pointed out the some price volatility is to be expected, even in a mature competitive market. In fact, volatility plays an important role in sending price signals to developers when new generation investment is needed. While ISO staff and regulators may think that administrative interventions flattening market price protect customers, in fact, skewing or masking prices will dampen new investment and market activity, which in turn eliminates the benefits competition would otherwise provide to those same customers. As we have clearly seen in other instances, most notably with the Natural Gas Policy Act, artificial price caps are likely to result in shortages, since generation developers are unlikely to invest in the face of the enhanced and asymmetrical risks price caps create.