FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON THE INVESTIGATION OF PUBLIC UTILITY RATES IN WHOLESALE WESTERN ENERGY MARKETS
COMMENTS
I. Cost-Based Price Mitigation is Counter Productive
The Commission’s proposal to implement a cost-based mitigation structure in California, and possibly the entire WSCC, will do little or nothing to promote increased supply in competitive robust wholesale energy markets, risk management, or demand response efforts. Price-capped markets are inherently riskier for generators, discourage investment and lead to a lack of adequate generating capacity.
Such cost-based measures will provide only short-term comfort at best and will have profoundly more serious consequences for energy prices and the long-term viability of the markets. The long-term problem in California, as elsewhere in the nation, is a shortage of generation and transmission capacity. The solution to such shortages is to maintain and strengthen competitive bulk power markets, so that market incentives and price signals will attract investment for building new, cleaner, and more efficient generating plants. The use of cost-based mitigation measures will not provide such a solution. Moreover, at a time when capital is needed to attract new generation and to expand and improve the electric system infrastructure, such proposed actions would create uncertainty that will discourage and delay this much-needed investment.
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 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.
In addition, price caps will lead to a suboptimal mix of generating units, favoring base-load plants when peaking units may be needed. 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.