FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON STANDARDS OF CONDUCT FOR TRANSMISSION PROVIDERS
POSITIONS
EPSA appreciates the opportunity to comment on the Commission’s NOPR and the Commission’s efforts to enable competitive electric and gas markets to flourish. EPSA’s comments are focused first on how aspects of the proposed rule will strengthen comparability in the electric transmission markets, and then address how the application of the rules regarding discounts applicable to the electric transmission industry to natural gas pipelines would inhibit the natural gas market by discouraging pipelines from offering selective discounts to meet competition.
A. COMPARABILITY FOR RETAIL AND WHOLESALE ELECTRIC SERVICE
EPSA applauds the Commission’s efforts to eliminate opportunities for electric transmission providers to discriminate and provide unequal access to information among electric transmission customers. In order to accomplish this, the NOPR proposes to require that all sales functions, including bundled retail sales, be separated from the transmission function. Additionally, the Commission proposes that transmission providers implement measures to end the preferential access to transmission information presently enjoyed by retail native load sales employees.
EPSA strongly supports these proposals. As explained below, treating employees engaged in sales or purchases solely on behalf of bundled retail native load as wholesale merchant function employees, separated from the transmission function, will substantially advance the Commission’s efforts to realize the objectives announced in Order Nos. 888, 889 and 2000. Bundled retail sales represent a large percentage of utilities’ sales; exempting employees engaged in this activity from the standards of conduct for the competitive power industry has obstructed and delayed the transition to fully competitive markets.
EPSA has continually supported the Commission’s efforts to achieve comparability in wholesale markets and to eliminate undue discrimination in electric transmission services due to lingering control by vertically integrated utilities. In our comments on the Commission’s NOPR on Order No. 2000, we stated that “…full comparability for retail and wholesale transmission service… will go a long way to eliminating the transmission provider’s incentive to favor its own generation or marketing affiliate.” As presently stated, the standards of conduct allow these incentives—and the resulting behavior that undermines the development of robust, competitive markets—to continue.
The immediate NOPR correctly recognizes that “employees engaged solely in a bundled sales function for retail native load can also perform transmission functions, and they may have access to all transmission, non-affiliated customer and market information available to the transmission provider.” It is difficult indeed for competitive markets to develop and flourish under these circumstances. EPSA urges the Commission to take all necessary steps to remedy these problems. Removing the incentives to discriminate, and preferential access to valuable transmission information, as proposed in the NOPR, could play a critical role in the Commission’s effort to establish economically efficient competitive wholesale electric markets.
In its NOPR for Order No. 2000, the Commission recognized the continuing opportunities for undue discrimination in transmission service, stating that “when utilities control monopoly transmission facilities and also have power marketing interests, they have poor incentives to provide equal quality transmission service to their power marketing competitors.” Moreover, it has become abundantly clear that these circumstances are impeding the transition to competitive wholesale power markets.
In fact, many of the complaints that led the Commission to this conclusion related to standards of conduct violations reported to the FERC. Furthermore, the Commission has observed that:
[I]nstances of discrimination may be undetectable in a non-transparent market, and, in any event, it is often hard to determine, on an after-the-fact basis, whether the action was motivated by an intent to favor affiliates or simply reflected the impartial application of operating or technical requirement.
This fact remains true. Since bundled retail sales comprise an overwhelming percentage of transmission activity, a significant portion of the wholesale power market is outside the scope of Order Nos. 888 and 889. Therefore, market participants are left to speculate as to the reasons behind many transmission provider decisions. In this connnection, the calculation and information relating to available transmission capability (ATC), and the related issues concerning TLRs and transmission scheduling, must be critical targets of Commission remedial action.
In its “Investigation of Bulk Power Markets” (Report), issued on November 1, 2001, FERC staff extensively discussed the problems associated with lack of posted information on TLRs and the harm caused by the absence of standardized protocols for calculating ATC, Capacity Benefit Margin (CBM), as well as the handling of transmission requests and scheduling.
Specifically, the staff attributed market uncertainty, price distortions and the general disruption of market activity to three areas that are essential to get right for markets to work well: (1) the lack of transparency surrounding TLRs; (2) the lack of confidence in ATC and CBM calculations; and (3) the lack of uniformity in processing transmission requests and scheduling service.
The Report presents a substantial body of evidence and analysis supporting the fundamental conclusion that the status quo is untenable. The Report notes that, ultimately, these problems are linked to the continued existence of vertically integrated utilities and the inherent advantages of native load:
It appears that many vertically integrated transmission owners may have incentives to resist efforts to make this information transparent and standardized, including information on the manner in which ‘native load’ is handled in making these calculations…[A]s a consequence, the Commission may wish to eliminate the native load exemption and have all transactions under the same tariff. Given that all transactions serve load of one sort or another, all load would be treated in the same manner. This would provide all transmission owners the proper incentives to make relevant information available.
In comments on the Commission’s NOPR on Real-Time Information Networks and Standards of Conduct (RINs NOPR), EPSA’s predecessor, EGA, noted that retail uses of the transmission system, by the transmission provider or others, is relevant to
determining how ATC is calculated. At that time, EGA also cautioned that vague standards for ATC calculation would be subject to abuse, and therefore were unacceptable. Regrettably, this problem continues. The Commission stated in Order No. 2000 that the Open-Access Same-Time Information System (OASIS), designed to publicly show transactions made for transmission, is not considered reliable in its postings of ATC numbers. As a result, many market participants are unable to conduct business with confidence, since they do not know how the number was calculated or whether it is even correct. This uncertainty hinders true competition.
As the Commission has noted in numerous rulemakings, comparability is paramount to achieving true competition. Without comparability, players in the market—whether they are generators, marketers, or transmission providers—will inevitably game the system in order to maximize profit. Economist Richard Tabors focused on the “gaming” theme in an in-depth examination of price volatility in transmission markets completed in April, 2000. Tabors discussion of “market learning” led him to observe that “another form of learning has occurred, in which the transmission providers who have remained vertically integrated have learned to profit within the rules for open access and market operations by effectively foreclosing competition and limiting access to key markets to the benefit of their marketing and generation affiliates.”
Tabors’ findings regarding transmission providers’ motive and potential to exploit existing rules governing ATC, TLRs and transmission scheduling in the Midwest generally reinforce and are largely consistent with the FERC staff Report. Tabors’ review of ATC postings and transmission refusals, while difficult to reconstruct, raises serious concerns. For example, he found several instances during which a merchant affiliate had active non-firm sales into an area during days when firm transactions from several paths into the same area were denied. Suspicions are heightened because of the short time frame for the merchant affiliate’s transactions (day-ahead or hourly, as opposed to monthly for firm requests) and the relatively high percentage of the merchant affiliate’s market share, or percent of all accepted requests in certain critical hours. As Tabors concludes: “[T]his resembles in qualitative terms very much a case of market foreclosure leading to significant increase in market concentration for [the merchant affiliate.]”
There are other examples of “market foreclosing behavior” contained in the Tabors Report that support the need for a revision of the standards of conduct applicable to electric transmission providers, including day-ahead versus hourly ATC discrepancies. Such ATC irregularities, even if within the existing rules, create and sustain unequal access to the transmission system. For example, in contrast to marketers who cannot risk waiting to confirm the availability of hourly market service, “[M]erchant affiliates of transmission providers, on the other hand, may have a greater ability and knowledge to participate successfully in the hourly market, particularly in adjacent load centers. Thus, this behavior gives them a competitive advantage, to the extent that their ‘through’ (or more likely ‘out’) path is an economically valuable path into that sink.”
Tabors comes to the unequivocal conclusion that “the basic structure needs change…the most pragmatic point of departure is requiring that all transmission transactions use the OASIS structure—removal of the native load exclusion.” Beyond this, to fully realize the Commission’s goals, it must make what Tabors calls the “hard decisions, the complete separation of transmission from generation, load and merchant functions.” In advocating the removal of the native load exemption, Tabors suggests that incentives lurking within the existing industry structure are fundamentally incompatible with the Commission’s effort to navigate through this period of industry transition:
Transmission providers are one element of today’s profit-maximizing utilities that also have merchant affiliates that market energy at market-based rates. The transmission provider that remains within the vertically integrated structure has (at minimum) an implicit incentive to continue to operate the transmission system so as to complement the profitability of its generation assets. If the vertically integrated utility maintains a native load requirement, the same incentive exists to act to shield the customers from external competitors. [emphasis added]
There is increasing evidence that this is not merely an abstract policy debate; whether and how the Commission addresses these problems will have far-reaching implications. A Department of Energy 1999 study assessing the consequences of prolonging the transition to well-functioning competitive markets provides reason to believe that continued opportunity for discriminatory behavior will actually result in increased costs to consumers. The study estimates that with competition, the delivered cost of electricity to all consumers in 2010 will be $32 billion lower than without competition.
EPSA acknowledges and appreciates the Commission’s ongoing effort to identify and resolve these difficult issues. In Order No. 2000, the Commission recognized that the lack of comparability and discrimination in electric markets can seriously hinder the development of competition:
Efficient and competitive markets will develop only if market participants have confidence that the system is administered fairly. Lack of market confidence... has real world consequences for market participants and consumers… We believe that the potential for such problems increases in a competitive environment unless the market can be made structurally efficient and transparent with respect to information, and equitable in its treatment of competing participants.
Finally, EPSA supports the NOPR’s clear directives to ensure the restriction of
retail native load employees’ access to preferential information. As EPSA has stated in the past, information availability and transparency is essential to prevent abuse of whatever regulations are implemented. As the FERC staff itself has concluded, “[I]nformation transparency is necessary for a market to function effectively. For this to happen, all participants must have equal and timely access to the information they need to make business decisions.”
Accordingly, EPSA supports the Commission’s suggestion to have transmission providers post their written procedures for implementing standards of conduct on both OASIS and Internet websites. Competitive power suppliers have an interest in the procedures that transmission providers will put into place for their standards of conduct, and should have easy access to these written procedures.
While EPSA strongly supports the Commission’s efforts to ensure comparability in the wholesale electric market, EPSA cautions the Commission in its efforts to transfer directly some of the electric transmission standards to the gas industry. Specifically, EPSA is concerned that the Commission’s proposal that transmission providers announce all discounts to all potential customers via the OASIS or Internet website at the time of offer will stifle selective discounting by gas pipelines.
Under current OASIS regulations, as established in Order Nos. 888 and 888-A and summarized in Order No. 889-A:
…three principal requirements are appropriate. First, any offer of a discount for transmission and/or ancillary services made by the Transmission Provider must be announced to all potential customers solely by posting on the OASIS. This requirement, which will ensure that all potential Transmission Customers under the Open Access pro forma tariff will have equal access to discount information, will guard against the Transmission Provider's wholesale merchant function or an affiliate gaining an unfair timing advantage concerning the availability of discounts.
Second, we will require that any customer-initiated requests for discounts of transmission and/or ancillary services occur solely by posting on the OASIS, regardless of whether the customer is the Transmission Provider's wholesale merchant function, an affiliate, or a non-affiliate. We will permit customer-initiated requests for discounts but will require that such requests be visible (via posting on the OASIS) to all market participants.
Third, we will require that, once the Transmission Provider and customer agree to a discounted transaction for transmission and/or ancillary services, the details be immediately posted on the OASIS. This requirement will be equally applicable regardless of whether the customer is the Transmission Provider's wholesale merchant function, an affiliate, or a non-affiliate.
Additionally, we believe that any “negotiation” between a Transmission Provider and a potential customer should take place on the OASIS, and should be visible to all market participants, and we will revise our regulations to accomplish this as soon as practicable.
In contrast, under the Commission’s gas standards, Standard (H)(1) specifies that if a pipeline offers a discount to its marketing affiliate, the pipeline must make a comparable discount contemporaneously available to all similarly situated non-affiliated shippers. Under Standard (H)(2), pipelines must post relevant information within 24 hours of the time at which gas first flows under a discounted transaction.
Under the NOPR, the Commission proposes to require all transmission providers—gas and electric—to announce all discounts to all potential customers via the OASIS or Internet website when the offer is made. While the Commission states that it “does not propose to change the current policy permitting natural gas transmission providers to offer selective discounts”, EPSA contends that the proposed change will severely curb pipelines’ abilities to offer selective discounts to meet competition.
Under public negotiations, with a requirement to offer the outcome contemporaneously to all similarly-situated shippers, it appears unlikely that pipelines will be willing to discuss discounts with any shipper, whether affiliated or not. In particular, EPSA is concerned that the change in policy will impair the ability of electric generators and marketers to negotiate discounts with pipelines when obtaining transportation capacity.
Other than consistency, it is not clear why the Commission is altering the manner in which pipelines traditionally have negotiated with and granted discounts to their customers. Discounting in the natural gas industry has provided significant benefits to customers. Therefore, it is not clear why the Commission would adopt the standards imposed on the electric industry, as that policy has not fostered any significant level of discounting for electric transmission customers. The Commission has recognized that there are differences between the electric and gas industries that warrant different policy for discounts:
[W]e note that there are factual differences between natural gas pipelines and public utilities that warrant differences in regulatory treatment. For example, a natural gas pipeline may be transporting gas for an end user that has the option of using natural gas or an alternative fuel such as oil. In that circumstance, a discount may make the cost of natural gas sufficiently competitive by comparison to the cost of oil, so that the end user will use natural gas over oil, and thus the discount can increase the natural gas pipeline's revenues over what they would have been had the end user opted to use oil (in fact, the natural gas pipeline's revenues in that latter circumstance, i.e., use of oil, might have been zero). That is not the case for public utilities. . . .
Some of EPSA’s concern over the proposed changes may be attributable to the lack of clarity in how the changes would be implemented. For example, can a shipper and pipeline representative have any discussions over the telephone regarding the potential for discounts? At what point does the Commission consider a discount “offer” to be made? However, even with clarification, the discount policy changes proposed in the NOPR are not likely to benefit either the gas or the electric transmission industry.
EPSA strongly encourages the Commission to continue its long-standing policy of fostering selective discounts by gas pipelines. Despite the Commission’s stated goal of maintaining its selective discounting policy, the specific changes proposed in the NOPR would undermine that intent. By continuing its existing discounting policy on the gas side, the Commission can maintain the recognized benefits of selective discounting for gas transmission customers, including existing and planned gas-fired electric generators.