FERC Filings
COMMENTS OF THE ELECTRIC POWER SUPPLY ASSOCIATION, THE COLORADO INDEPENDENT ENERGY ASSOCIATION, THE ELECTRIC POWER GENERATION ASSOCIATION, INDEPENDENT ENERGY PRODUCERS OF CALIFORNIA, INDEPENDENT POWER PRODUCERS OF NEW YORK, INC., MIDWEST INDEPENDENT POWER
EXECUTIVE SUMMARY
The Electric Power Supply Association (EPSA), Colorado Independent Energy Association (CIEA), the Electric Power Generation Association (EPGA), Independent Energy Producers of California (IEP), Independent Power Producers of New York, Inc. (IPPNY), the Midwest Independent Power Suppliers Coordination Group (MWIPS) and the Western Power Trading Forum (WPTF) (herein, Competitive Suppliers) welcome this opportunity to file comments on the Notice of Proposed Rulemaking on Remedying Undue Discrimination Through Open Access Transmission Service and Standard Electricity Market Design (NOPR). Competitive Suppliers largely endorse the Commission’s proposals and urge the adoption of a Final Rule, with certain critical modifications, as soon as possible.
In a nutshell, the proposed rule includes five components that are critical to completing the transition to effective, workable competitive wholesale markets that bring benefits to electricity consumers. These are:
1. A single, flexible tariff designed to eliminate discrimination between bundled and unbundled transmission services;
2. The development of financially binding day-ahead and real-time spot markets (short-term markets), supported by a Locational Marginal Pricing (LMP) approach to congestion management;
3. Minimum standard requirements for the design and operation of wholesale power markets, with particular emphasis on minimizing the current “seams” problems;
4. The independent operation of all jurisdictional transmission facilities and markets; and
5. A long-term resource adequacy program that, if properly designed, will ensure adequate reserves, thus minimizing the need for intrusive mitigation.
These five elements are the fundamental pieces of the Standard Market Design (SMD) that are necessary to promote the goals stated in the NOPR – to eliminate discrimination and promote competitive wholesale power markets in order to bring benefits to America’s electricity consumers.
Of utmost importance is the insistence on the use of a single Network Access Service (NAS) Tariff. The Commission is finally taking definitive steps that EPSA, as well as others, originally urged in 1999. Through a single tariff that applies the same terms and conditions to all wholesale transmission facilities, transmission-owning utilities will no longer have an incentive to favor their own generation resources. With the NAS Tariff in place, the short-term markets can flourish and ensure the liquidity, transparency and risk management tools needed for robust markets. These markets will balance the physical operation and reliability of the system with market-based economics that will benefit consumers. They also will utilize an LMP mechanism to manage congestion and send needed price signals to incent new and existing infrastructure.
This critical aspect of the NOPR proposal sets the stage for another important element – the development of minimum, uniform elements for market design and operation to facilitate robust and seamless regional electricity markets. Seams issues must be addressed by all entities operating transmission facilities and energy markets in order to establish regional and interregional markets for wholesale electricity. Competitive Suppliers believe that the ultimate seams resolution tool is the Commission’s adoption of SMD, replete with common market structures, procedures and software.
Due to the critical need for short-term markets to operate properly, they must be run by an independent Regional Transmission Organization (RTO) or Independent Transmission Provider (ITP). Similarly, the RTO or ITP also must administer all jurisdictional transmission facilities to guard against discrimination and ensure reliable operation and service of the electric power system. While Competitive Suppliers share the Commission’s goal of independent management of the transmission system, we must guard against the problems that will develop if ITPs lack the regional scope and size required of RTOs.
As long as short-term power markets continue to be aggressively mitigated, Competitive Suppliers also endorse a properly designed, long-term resource adequacy requirement. Ideally, a resource adequacy requirement will ensure adequate generation capacity and eliminate the need for excessive mitigation in short-term, price-capped markets. While the concepts underlying the Commission’s resource adequacy requirement are important, the proposal, as conceived, will not accomplish the Commission’s stated goals. Competitive Suppliers are troubled by the Commission’s apparent lack of appreciation for the interplay between mitigation and resource adequacy. As proposed, there is a high likelihood that mitigation in the short-term markets will undercut the resource adequacy requirements, discouraging load-serving entities from hedging their short positions in the market by signing the longer-term contracts needed to support a resource adequacy requirement. This will forestall the necessary investment in new generation or the ability to maintain the viability of existing generation.
While the transition to a fully functional competitive market may necessitate some form of mitigation to counter non-competitive situations, the Commission also must guard against the harm created when markets are repeatedly and persistently mitigated below the cost of entry into those markets. With this in mind, Competitive Suppliers have concerns with the Commission’s overall mitigation regime as proposed. Though the abuse of market power must be eradicated to complete the transition to liquid, robust, competitive wholesale markets, there is a danger that excessive mitigation will lead to unintended consequences. As was proven in California over the past two years, intrusive price intervention distorts price signals, which then inhibits market operations, delays investment in needed infrastructure and hampers the transition to fully competitive markets.
For this reason, a resource adequacy program is an integral and necessary component for any market mitigation strategy. Though there are flaws and ill-defined features in the NOPR proposal, a well-functioning resource adequacy program may alleviate some of the negative impacts of mitigating short-term markets by providing compensation outside the energy and ancillary services markets to incent and maintain investment decisions. Detailed comments on the NOPR’s resource adequacy proposal will be filed with the Commission in January. However, the role of a resource adequacy program is discussed herein because of its importance in focusing the proper level of attention on necessary long-run marginal cost recovery.
As for the four-pronged approach to mitigation proposed in the NOPR, the Commission must consider the different circumstances and market forces at play in constrained markets, such as load pockets, and those in unconstrained markets. The Commission has properly acknowledged the bifurcation between long- and short-term markets. Competitive Suppliers support the NOPR’s differentiation of these market dynamics, but remain concerned with the mitigation measures contemplated for each market situation. Without a showing of sustained market power abuse, for instance, any mitigation mechanism beyond a safety-net bid cap will result in unintended consequences and may harm the long-term bilateral market by offering a cost-free regulatory hedge against price volatility in short-term markets. Also, while mitigation in the NOPR is intended to serve as a proxy for demand response, there is analysis that shows that loads are responding to price signals in restructured markets. As discussed herein, regional demand response programs have resulted in elastic demand bidding when markets are properly designed with functional day-ahead and real-time markets.
In load pockets or areas where markets are constrained or unworkable for some reason, mitigation must be focused on solving, rather than perpetuating, the underlying problem. Mitigation measures set below the cost of entry into those markets only perpetuate the problem because the scarcity prices that might bring new entry or maintain existing resources are artificially suppressed.
Specifically, the proposal to include a voluntary Automated Mitigation Procedure (AMP)-type mechanism does not accomplish its purported goal of acting as a “circuit breaker.” Rather, an AMP acts as a price cap, which is arbitrary and fails to distinguish between scarcity, the cost of entry and abuse of market power. It also undercuts the locational price signals that LMP is designed to send. In addition, there is concern that the Commission has failed to recognize and address serious flaws in the market rules being used in maturing Northeast markets (upon which the SMD is largely modeled) that prevent appropriate scarcity value from being reflected in the clearing prices during shortage conditions. Dr. David B. Patton recently has found that these problems are endemic to all of the existing LMP-based markets and must be rectified in order to ensure efficient pricing. In place of the AMP, Competitive Suppliers recommend two alternatives that may achieve the necessary goals to transition to a fully competitive market: a call option as compensation for Reliability Must-Run (RMR) service suppliers in load pockets and a bid cap defined at the cost of entry (CT Proxy Cap alternative).
Looking beyond mitigation, an independent Market Monitoring Unit (MMU), which serves as an early warning system, is the primary mechanism by which the Commission can ensure market efficiency and equity. While the MMU should not intrude into or try to “make” the market, it should evaluate the operation of the market to detect either design or structural flaws in the market, as well as ferreting out instances of market abuse. To be effective, the MMU must be fully independent of the RTO or ITP, have a large regional scope and have oversight over all market participants, including the ITP. Market power or operational anomalies can be caused by all players in the market – supply resources, transmission owners, load-serving entities (LSEs) – as well as by the market operators themselves. Hence, it is imperative that the Commission offer specific guidelines on the role of the MMU, market design and operation issues and the behaviors that indicate the possibility of market power abuse. Enforcement, then, must be left to the Commission and the Department of Justice (DOJ).
Since some may challenge the Commission’s legal authority to take the steps proposed in the NOPR, Competitive Suppliers’ comments provide a strong legal defense of the Commission’s actions, both with respect to the SMD generally and on the resource adequacy issues specifically. These legal arguments are contained in Attachments A and B to this document. In short, the Commission is on firm legal ground in adopting the SMD and, thus, there is no reason not to move quickly to adopt a Final Rule.
In the last sections, Competitive Suppliers address additional issues, including governance of ITPs and RTOs and several outstanding tariff issues. Specifically, Competitive Suppliers support the Commission’s insistence on independence for RTOs and ITPs and many of the steps the Commission is taking to assure that independence. Competitive Suppliers also comment on: (1) the need to assure that access charges eliminate rate pancaking; (2) elimination of the requirement to designate network resources; and (3) service for grandfathered contracts.
Finally, Competitive Suppliers recognize that critical components of the NOPR, including transmission planning, funding of transmission upgrades, issues associated with congestion revenue rights and the role of states have been deferred to the January 10, 2003 comment deadline. While Competitive Suppliers anticipate filing additional comments by the January deadline, some of the issues reserved for later comment are clearly implicated in issues addressed in these comments.