FERC Filings
REQUEST FOR CLARIFICATION OR IN THE ALTERNATIVE REHEARING OF THE ELECTRIC POWER SUPPLY ASSOCIATION-Docket No. EL00-95-012, Docket No. EL00-98-000, Docket No. RT01-85-000, Docket No. EL01-68-000
5. The Commission Needs To Clarify The Conditions On Market–Based Rate Authority
The Order provides that certain types of bidding behavior are prohibited and could result in both refund obligations and conditioning of market-based rate authority. The second category of prohibited bids is unclear. The Order prohibits bids:
<center>that vary over time in a manner that appears unrelated to change in the unit’s performance or changes in the supply environment that would induce additional risk or other adverse shifts in the cost basis.</center>
The Order goes on to provide as an example, a bid that “appears to change only in response to increased demand or reduced reserve margins.”
This language appears to misunderstand the very nature of market-clearing prices in a fully competitive market. Even in the textbook world of perfect competition, market prices must rise to a level sufficient to cover total costs, including a return on capital. The Commission’s proxy marginal cost method is unlikely to allow market-clearing prices to rise to this level. As noted above, the proxy market-clearing price is not a true market-clearing price because it artificially excludes the highest cost bids. Further, it fails to include any marginal capacity costs in its measure of short-run marginal costs.
The practical implication of this is that bidders will have to actively bid in a way to assure full cost recovery, which means bidding higher in high demand periods. Two examples of costs that must be recovered through demand-sensitive bidding are start-up and no-load fuel costs for any plant and capital costs for new peaking plants. For inframarginal units (those with short-run marginal costs below the Commission’s proxy price) some of these costs may be recovered even with the Commission’s proxy price methodology. But, because a true market-clearing will not be used, full cost recovery will not be permitted for other units – unless they can bid higher prices at certain peak times.
In addition, all markets are expected to respond to information, including weather, outage information and other market intelligence. This is a common feature of all markets and should certainly not be precluded in California.
Market-based rate authority has traditionally been predicated on an inability of the seller to exercise market power in generation or transmission markets. The Commission’s conclusion in the April 26th Order that it will revoke or condition market-based rate authority based on a legitimate bidding practice without a finding of abuse of market power is a troubling development that should be clarified. Revocation or conditioning of market-based rate authority should be limited to a Commission finding that market power has been abused, not to a review of bidding practices that may represent legitimate efforts to recover total costs. Further, the Commission should clarify that demand-sensitive bidding is acceptable if needed to assure cost recovery.