FERC Filings
MOTION OF EPSA FOR LEAVE TO INTERVENE, NSTAR SERVICE CO.
II. PROTEST
On June 13, 2000, NSTAR filed this complaint, arguing that restructuring of the New England energy markets is structurally flawed and is producing non-competitive results. In addition to the $1,000 price caps, termed an "interim 'safety net,'" NSTAR asks the Commission to direct NEPOOL to assess the competitiveness of its restructured markets and implement a "structural screen" to mitigate market power in the absence of workable competition. NSTAR asked for Fast Track processing of its complaint, leading to the accelerated schedule for interventions.
EPSA is increasingly concerned that the knee-jerk reaction of load serving entities (LSEs)<sup>1</sup> to any type of price volatility is the imposition of price caps. This approach, while seductive, is, in fact, bad public policy that will exacerbate and extend the problems faced by infant markets. FERC should reject NSTAR's call for price caps and take the lead in insisting on the implementation of policies which foster workably competitive markets. The implementation of price caps do not accomplish the goal of fostering the development of nascent markets.
There are numerous reasons FERC should reject NSTAR's call for price caps:
The Commission's goal is the establishment of workably competitive wholesale markets in which suppliers and LSEs make appropriate economic decisions and manage their respective risks. Ideally, market signals, in the form of prices, should provide incentives for investment in new supply and allow for appropriate demand side response (in the form of load management or risk management). Price caps blunt those signals, distorting supply investment decisions and providing a free regulatory hedge to some LSEs. In short, price caps delay the development of workably competitive markets, while doing nothing to solve the host of underlying problems - software inadequacies, lack of suppliers, transmission constraints, operating restrictions, poorly conceived and implemented market rules, lack of interregional coordination - facing today's restructured energy markets.
EPSA is concerned that every time a problem has developed in a start-up market, where the LSEs are unhappy with prices, a "temporary" price fix has been suggested.<sup>3</sup> These have taken the form of price caps in California and PJM, or the extension of "extraordinary powers" in New York and New England. The net effect of these "remedies" is to delay the maturation of the markets in question and to lessen the incentive for the ISO and the market participants to get to the root of the problem and fix it. These actions, while designed to address short-term problems, have long-term effects on the marketplace, undermining the confidence of suppliers, damaging liquidity, limiting investment and, ultimately, threatening reliability.
For competitive markets to flourish, supply and demand must interact freely to determine the price, thereby allowing market participants to make intelligent resource allocation decisions. The imposition of an arbitrarily determined $1,000 price cap will dampen market price signals and chill development of generation because of uncertain market prices. In short, the best defense against price spikes is to encourage greater numbers of suppliers to enter the market, not to restrict existing suppliers to artificially determined rates.
Price-capped markets are inherently riskier for generators, discouraging investment and leading to a lack of adequate generating capacity. In addition, price caps will lead to a suboptimal mix of generating units, favoring base-load plants when peaking units may be needed.<sup>4</sup> Peaking plants must recover their entire operating cost in a limited number of days, or even hours. Competitive power suppliers take all the risks associated with these plants and must have confidence that market-clearing prices will reach the levels necessary to ensure a return on their investment. Competitive generators are not asking for a guaranteed return on their investment; rather, they are merely asking for a fair opportunity to recover their investment. If price caps delay needed investment in generation resources, reliability problems will ensue, leading to the need for more costly solutions later. In other words, price caps merely postpone, rather than limit costs.<sup>5</sup>
Price caps also send the wrong signals to LSEs, again delaying the development of workably competitive markets. Without an incentive to manage demand or hedge risk, LSEs create a "vertical price curve," in which the value of the "last megawatt" is infinite. In this scenario, price caps become the only logical solution. The approach, however, is self-perpetuating and fails to lead to a more lasting solution. Price caps eliminate incentives for LSEs to hedge risk, either physically or financially. In fact, LSEs are given a free, regulatory hedge to the competitive disadvantage of competitive market participants who invest in hedging "tools" and learn to manage risk appropriately. With perpetual "training wheels," LSEs never learn to manage the risks inherent in a competitive market. Again, problems are postponed, but not solved.
In addition, while the adverse impact of price caps on the developing wholesale marketplace is clearly negative, the wholesale market does not operate in a vacuum. Supply shortages, after-the-fact wholesale price changes, and the associated uncertainty will severely and adversely impact the development of nascent competitive retail electricity markets in the New England region as well.
In addition, NSTAR's broad, unfocused allegations of gaming and market power are misplaced. NSTAR makes no effort to more precisely target its allegations of market power resulting in all market participants being tarred with the same brush. If specific market participants are in fact abusing their market power in ways that are detrimental to the functioning of the market, those practices must be curbed. However, NSTAR presents no evidence that any alleged abuse of market power or collusion has affected market prices; clearly, unsupported suggestions of improper conduct are insufficient grounds for the extreme relief NSTAR seeks.
The more prudent approach would be to stay on course and focus on fixing the problems identified with the NEPOOL-operated markets and developing intermediate (e.g., generation redispatch and demand-side responses) and longer-term (e.g., additional investment in generation and/or transmission) solutions to price volatility.
1. The comments contained in this filing represent the position of EPSA as an organization, but not necessarily the view of any particular member with respect to any issue.
2. It is important to note that in the wholesale market, it is load serving entities, not load itself, that need to respond to price signals and hedge risk.
3. Often, these requests are an attempt by utilities to insulate themselves from decisions and risks that necessarily accompany competitive markets. If prices were expected to drop, instead of rise, over the summer, those same market participants might find themselves in an enviable competitive situation and would not be before the Commission seeking price changes.
4. It is important to note that competitive power suppliers, unlike traditional utilities, need to recover the cost of a generating unit from the facility alone. There is no opportunity to average the cost of peaking units with base-load units as utilities do.
5. A good analogy may be to a fifteen-year versus a thirty-year mortgage. While the monthly payments are lower with a thirty year mortgage, you pay substantially more over the term of the note.