FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION re: STANDARDS OF CONDUCT FOR TRANSMISSION PROVIDERS
EPSA'S POSITIONS
EPSA appreciates the opportunity to offer additional 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 by adding behavioral remedies and then offers some additional comment on quantification issues raised at the conference.
A. COMPARABILITY FOR RETAIL AND WHOLESALE ELECTRIC SERVICE
EPSA applauds the Commission’s efforts to eliminate opportunities for electric transmission providers to discriminate and to allow unequal access to information among electric transmission customers. The NOPR is an important step forward in the Commission’s efforts to achieve comparability as it proposes to require that all sales functions, including bundled retail sales, be separated from the transmission function. Moreover, 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 again asserts its strong support for these proposals. Treating employees engaged in sales or purchases solely on the 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 caused by the continued control exerted 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.” The current standards of conduct allow these incentives—and the resulting discriminating behavior that undermines the development of robust, competitive markets—to continue.
The standards of conduct proposed in the NOPR will provide the needed behavioral measures to begin the process of eliminating discrimination in the marketplace. Moreover, the proposed rules will complement the structural rules the Commission is pursuing in its Standard Market Design (SMD). Implementing complex SMD items, such as locational marginal pricing (LMP) and a new single tariff, will be hindered if the proposed new affiliate rules are not in place. The structural remedies of the SMD will do little to facilitate better markets if integrated utility affiliates can still share information in a manner that discriminates against other market participants. The NOPR rules will ensure comparability by preventing a transmission provider from favoring an affiliated customer over any other customer. Therefore, it is important that these behavioral rules be in place and working when SMD is implemented.
Currently, integrated utility employees control market functions and have access to information important to all transmission customers. The 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. Therefore, EPSA supports the Commission’s NOPR since it would establish new behavioral rules that would prevent discriminatory information from being shared between affiliates. The creation of rules that focus on preventing the implicit and explicit abuses between affiliates will go a long way toward removing the incentives to discriminate and the preferential access to valuable transmission information. When the behavioral remedies proposed in the NOPR are established as a final rule, the affiliate rules will play a critical role in the Commission’s effort to establish economically efficient competitive wholesale electric markets.
The Commission has recognized that continuing opportunities for undue discrimination in transmission service still exist, noting in its NOPR for Order No. 2000 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.” In fact, many of the complaints that led the Commission to this conclusion related to standards of conduct violations reported to FERC. Moreover, it has become abundantly clear that these circumstances are impeding the transition to competitive wholesale power markets. Consequently, as the NOPR proposes to define the relationships between affiliates less of these violations should occur.
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 and therefore do not have the same incentive to report preferential information. Consequently, market participants are left to speculate as to the reasons behind many transmission provider decisions. In its “Investigation of Bulk Power Markets” (Report), issued on November 1, 2001, FERC staff extensively discussed the problems associated with the lack of posted information. The Report presents a substantial body of evidence and analysis supporting the fundamental conclusion that the status quo is untenable since it contributes to the perception that information is not shared comparably among market participants. 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.
The NOPR, by subjecting bundled retail affiliates to the code of conduct, will certainly limit the potential for the discrimination that currently exists. Accordingly, EPSA supports the NOPR’s clear behavioral 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 are 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.”
B. COST/BENEFITS OF THE AFFILIATE RULE AND COMPETITIVE MARKETS
The Commission has asked for quantifiable evidence on the costs and benefits of this proposed rulemaking. Unfortunately, it is difficult to provide such an analysis because it is hard to document and quantify the benefits attributed solely to this proposed rule. It is clear, however, that extending the code of conduct to employees purchasing for native load sales will reduce some of the current discrimination and market inefficiency. This, in turn, will lead to more competitive markets, which have been shown to provide significant benefits to consumers.
There is quantifiable evidence showing that non-discriminatory competitive wholesale markets will lower costs to consumers. As EPSA highlighted in its original comments, a 1999 Department of Energy 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. Additionally, RTO cost/benefit analyses, such as the FERC study, have suggested discounted net benefits of over $41 billion for the 2002-21period. Other regional studies, when extrapolated to a national level, suggest an estimated net consumer benefit ranging from $3 to $6 billion a year. Varying scenarios, net versus gross amounts or discounted versus undiscounted results, make comparing the results of different studies difficult. However, these studies show that consumers will potentially benefit several billion dollars with the creation of competitive wholesale electric markets. These benefits can be used as a proxy for the benefits accruing from this rule.
As was shown at the technical conference, cost estimates related to the implementation of the rule can vary significantly, even when done by two separate investor-owned utilities (IOU). Cinergy Services presented a high-end cost of $210 million over a five year period, while LG&E/KU put forth a maximum cost of only $15 million for the same 5 year period. Extrapolating the Cinergy figure to the entire IOU industry gives an estimated cost of $5.2 billion over the 5 year period. If one assumes the lower cost figure put forth by LG&E/KU, the cost would be considerably less, amounting to an estimated $78 million over the same period. Given the significant variance of these two results, the Commission has not been presented with reliable evidence to determine the costs that vertically integrated utilities would incur due to the proposed rule.
Furthermore, the Cinergy and LG&E/KU responses to the Commission’s questions about the operational relationships between their transmission companies and retail sales affiliates do not show how potential benefits of competitive wholesale markets could offset the potential costs. One example is that the responses indicated that operational tasks that could be done by an RTO were still being performed by the utility. Consequently, the cost figures presented have the potential to be reduced when the would-be benefits not considered in these cost analyses are included. At a minimum, however, the figures show that the potential benefits that customers will realize when regional RTOs are fully functioning and robust competitive markets are in place should greatly offset any costs incurred by the final rule.