FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION ON THE WORKING PAPER ON STANDARDIZED TRANSMISSION SERVICE AND WHOLESALE ELECTRIC MARKET DESIGN
DISCUSSION
a. Transmission Rights
The Commission recognizes the importance of Transmission Rights (TRs) in the White Paper by defining them and beginning to establish the rules that will be associated with TRs. Successful and efficient congestion management systems need a TR process that allows customers to manage their exposure to volatile congestion costs. These mechanisms will help send the right signals for new infrastructure and will also provide price certainty in the market. This is clearly a “tier one” issue that needs to be resolved in the initial SMD efforts.
The Commission’s recommendation to use only point-to-point Financial Transmission Rights (FTRs) does not provide sufficient price certainty. In fact, when congestion reverses, FTRs become a payment obligation for the FTR holder, and without an energy transaction of the same magnitude in place during such a time, the owner incurs a financial liability. For this reason, the Commission needs to require transmission providers to offer FTRs as options, as well as obligations.
While acknowledging the importance of TRs, the Commission has decided to set the issue of TR allocation for further debate and consideration during the evolution of the NOPR process. There is one issue that needs to be clearly and emphatically resolved early in the SMD process: TRs should be made available to all market participants on an equal basis through periodic auction procedures and an effective secondary market. Specifically, existing transmission rights that have been reserved since Order No. 888 should be converted to FTRs and the remaining rights should be auctioned. Auction revenues should be returned to existing firm transmission customers based on their pre-existing reservations or used to construct new facilities that would be used to reduce or eliminate the constraints (or some combination of the two). While some parties advocate allocating the TRs to existing load or reservation holders, the experience of financial congestion rights in NYISO and PJM clearly demonstrates that an auction process is preferable to allocation. Given the importance of TRs to the success of competitive electricity markets, the Commission must decide its TRs policies in favor of an auction process as soon as practicable; but in any event, no later than the publication of the Final Rule.
b. Generation Adequacy
Ensuring generation adequacy in competitive markets is another critical issue in SMD. EPSA believes there should be a binding, long-term obligation for load serving entities to procure, through bilateral contracts or otherwise, adequate capacity resources. Capacity obligations should not create unwarranted advantages to incumbents or create barriers to new entry in wholesale or retail markets. Parties need flexibility in determining how capacity obligations can be met, pursuant to established standards for both generation and load. Suppliers need to be compensated for providing capacity-related services, such as call options and recall options, required by the RTO to sustain reliability.
Particularly in bid-capped markets, suppliers need valuation signals that demonstrate the need for capacity, since price caps dampen the signals that would otherwise exist. EPSA believes that adequate demand response, as well as bidding rules that send accurate price signals to generators and load, will elicit adequate capacity. However, if the Commission continues to authorize bid caps, EPSA recommends that market rules strike the right balance to ensure that adequate capacity is available to meet demand. As discussed further below, EPSA continues to support the proposition that any bid caps and other interventions be time-limited. Bid caps that are designed to serve as a proxy for demand response should be phased out when adequate demand response occurs. In addition, suggestions in the Working Paper concerning formulating rules for the designation of must-run units are particularly important.
EPSA looks forward to discussing the linkage between generation adequacy rules and mitigation, since the details will significantly influence the success of implementing these measures. Additional comments and forward-looking suggestions also associated with generation adequacy are in the Market Power and Mitigation section below.
c. Market Power and Mitigation
EPSA welcomes the Commission’s emphasis on identifying and remedying market power abuse. Abuse of market power is at odds with competitive markets and prevents consumers from seeing the benefits of those markets. Therefore, it is important for the Commission to identify market power and remedy the abuse. It is critical in the development of the SMD that the Commission should clarify that it alone can implement forward-looking mitigation measures and not the Market Monitoring Unit of the RTO. In fact, EPSA endorses many aspects of the Commission’s principles on market power monitoring and mitigation, particularly the focus on minimizing market power by good market design, facilitating new entry and increasing demand response.
Since market power can take many forms, the breadth of issues outlined in the Working Paper provides a useful basis for developing approaches to identifying market power. Furthermore, the market monitoring section of the paper suggests potentially important concepts for the remedy process. The paper outlines several market design structures and rules that could also serve to mitigate market power and eliminate it prior to its occurrence. EPSA is concerned, however, about the recurring focus on withholding as the source of market power. There is little, if any, evidence that market power is exercised in this manner, and efforts to combat alleged withholding are inevitable intrusive and disruptive to market functioning.
The Commission should also explore solutions to avoid the appearance of market power in load pockets. As EPSA has suggested in its response to Chairman Wood’s Strawman addressing market power monitoring and mitigation, the Commission could establish a system by which specific generating units could provide call options for power at a competitively bid price. The suggestion is intended to address existing load pocket issues. The capacity payments for the units inside the load pocket could be limited to the cost of transmission investments to remove constraints or the cost of new local generation capacity. This solution is consistent with the above comments on generation adequacy, since this would be a temporary measure that could be used until demand responses would be sufficient in a given market.
As noted above, EPSA is concerned that bid caps and other market interventions disrupt well-functioning markets and delay the transition to workable competition. However, EPSA looks forward to the opportunity to work with the Commission and the industry to develop a thoughtful and workable approach to restoring confidence in today’s energy markets, while allowing competition to mature and bring benefits to consumers. Both the Staff Working Paper and the Chairman’s February 7th Strawman Paper will provide a good starting point for further discussions.