FERC Filings
EPSA Comments On The Establishment and Use of Reference Prices
Comments
a. The Conduct and Impact Test
It is vitally important that the Commission not focus on reference prices in a vacuum – the Commission must simultaneously reconsider the continued use and effectiveness of the CIT or AMP mechanisms overall and ensure that the reference prices, if set, are compensatory. The Commission must consider and reevaluate the use of the CIT or the AMP in those markets where it currently functions.
As stated in several FERC orders on mitigation proposals for the NYISO, the AMP was intended and approved as a temporary measure to guard nascent organized markets against market power concerns. In a 2001 order on the New York ISO AMP proposal, the Commission concluded,
The Commission views the proposed mechanism as only a temporary solution, and agrees with certain of the intervenors that the proposed AMP may mitigate bids in situations where market power is not the cause for high or volatile bids….We do not share the NYISO's view that automatic mitigation is best done based solely on an examination of bidding behavior without determining whether there is an underlying structural market power problem.
The Commission expressed the same sentiment in an order on the ISO-NE market.
The Commission will approve only mitigation measures that address well-defined structural problems in the market. As markets mature, we expect that underlying structural problems causing market power will be resolved, and at that point behavioral mitigation rules can be removed.
Certain RTO and ISO markets have likely reached that time at which any limited benefits of automated mitigation measures are outweighed by the risks of bids being mitigated improperly by such measures. The Commission must always be wary of allowing mitigation schemes to continue which were developed to solve short term problems, but over time have led to “mitigation creep” in which there is a reliance on mitigation as the market solution.
Instead, the Commission has taken another tack on the AMP issue. In March 2002, the Commission approved AMP in the NYISO without imposing a time limit on the ISO’s use of the procedure, noting that, should there be no exercise of market power in the New York market, the AMP would not be triggered – a no harm, no foul approach. That is not the case, however. Instead, the AMP now functions as a de facto cap on those markets in which it is utilized, directly affecting market participants’ behavior and artificially dampening prices. This finding has been upheld by the D.C. Circuit Court of Appeals. In a January 14, 2005 decision issued by that court, it was found that in the NYISO, based on evidence submitted by Edison Mission Energy et al.,
Even though the AMP was not triggered, Klein [an Edison Mission employee] plausibly—and without contradiction—attributed that to generators’ awareness of the AMP and anxiety to avoid the effect of its rather serious penalty provisions. Klein Affidavit at 7; for details of penalty provisions, see Attachment H at § 4.3. If prices are suppressed in a competitive market, a natural inference is that suppliers who could otherwise profitably enter will be deterred from entry.
Hence, not only has the AMP not acted as a benevolent guard over market power concerns in New York, it has in fact become a more egregious and stringent price cap than the $1000 bid cap already in place for the NYISO. The Court concluded,
The AMP may well do some good by protecting consumers and utilities against price increments caused by the exercise of market power. But the Commission gave no reason to suppose that it does not also wreak substantial harm—in curtailing price increments attributable to genuine scarcity that could be cured only by attracting new sources of supply.
Because the AMP functions as a market cap, it must be interpreted and treated as a market design element that offers purchasers in competitive markets a cost-free hedge against price volatility or market fluctuations. Without those signals sent via normal and functional short-term volatility, there will never be adequate supply, infrastructure, demand response or investment. As long as price signals are muted in this fashion, limiting normal and functional short-term price volatility, new investment is at risk and demand response will be blunted. In short, the Commission must take this opportunity to reevaluate the AMP mechanism altogether, including the process of establishing reference prices. Where price signals respond to scarcity under peak situations, markets must be allowed to operate efficiently.
b. Reference Prices
As to reference prices more specifically, there is concern that such prices are not compensatory. An unbalanced approach to setting reference prices in an RTO or ISO may result in a return to the equivalent of cost-based rates (such as “cost plus ten percent” methodologies, advocated by PJM’s market monitor) and short run marginal-cost pricing that includes only fuel plus variable operating and maintenance costs. These pricing schemes do not reflect the economic realities of generating operations nor the value delivered to the consumer. This approach is harmful to the market in the long term by failing to adequately compensate generators, thus impacting investment in generation, inhibiting price signals for needed generation and transmission infrastructure, and undermining rather than supporting the Commission’s goal of developing robust, competitive wholesale markets. The Commission must avoid a “death spiral” wherein resources become short, prices are mitigated to non-compensatory levels, building plans are cancelled or postponed and resources become shorter, leading to further reliance on mitigation as a substitute for market pricing.
Any formula or approach to the development of reference prices must lead to a compensatory price level. Compensatory prices must include all aspects of marginal value, including capacity value; start up costs, scarcity, opportunity costs , risk , transmission constraints and emission offsets. Hence, regardless of how and by whom reference prices are developed, while they continue to be an element of certain mitigation mechanisms utilized in organized markets, they must adequately reflect the true costs of generation units. EPSA urges the Commission to ensure that any reference prices relied on for temporary mitigation measures are compensatory and transparent, allowing the Commission to fulfill its obligation to ensure just and reasonable rates.