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APPA Updates Plan to Reform RTO Markets
June 17, 2011
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Frustration of policymakers in Maryland, New Jersey, Connecticut and other states with capacity prices, "stems from a basic flaw in RTO-run centralized markets -- they do not sufficiently support new generation investment but instead overcompensate existing generators," the American Public Power Association said in an update to its Competitive Market Plan
High capacity prices have been the main driver of various proposals that threaten retail choice in some half a dozen states.
"While those supporting locational capacity markets claimed to regulators and load-side interests that such markets would send 'price signals' to generators as to where to invest in new generation, there has been no demonstrated relationship between prices and investments in new resources," APPA said.
"Instead, consumers have paid literally billions of dollars through these markets to incumbent generators with existing units. While it is true that these markets have supported development of new demand response resources, and existing generation that might have otherwise retired has stayed on line, it is questionable whether these benefits justify the very high associated costs," APPA added.
"Against [a] backdrop of continued inadequate market oversight, are increasingly successful attempts by incumbent generation owners to develop new sources of revenue, either through changes to current market rules or through the creation of new markets -- almost always over the strenuous objections of consumer and load-side representatives. Such enhancements of revenue streams, however, are being implemented absent any measures to ensure a reliable supply of power in the future to justify the payment of such revenues," APPA said.
"Illustrative of these types of controversies are the proposal for scarcity pricing in PJM, the recent battles over measures to prevent state-procured new generation resources from participating in ISO New England’s Forward Capacity Market ('FCM') and PJM's Reliability Pricing Model ('RPM'), and the bitter disputes in the PJM Interconnection ('PJM') regarding the specific load forecasts that PJM uses in administering its RPM," APPA said.
"But even more disturbing to APPA has been the reappearance of 'RTOhopping,' i.e., the practice of transmission- owning utilities with affiliates that have unregulated generation units moving from one RTO to another to take advantage of more lucrative payments for their generation assets."
APPA in particular blasted comments from FERC Chairman Jon Wellinghoff who has been quoted as saying it is a "good thing" that transmission owners evaluate which RTOs are most beneficial to their business models, and that RTOs recognize that they may lose members to another RTO with a more attractive structure.
"When the concept of 'competition' in RTO regions has devolved from determining which RTO (and RTO market designs) can best harness competition to deliver just and reasonable prices to consumers (as the Federal Power Act ('FPA') requires) to which RTO can offer generation asset owners the most dollars to join their organization, something is badly amiss. FERC regulation of RTOs under the FPA has reached the point where, when the GAO criticized FERC for not sufficiently evaluating and assessing RTO market performance, FERC turned to the RTOs themselves to design 'metrics' to measure their own performance, and then adopted those metrics with very few changes," APPA said.
However, APPA's proposed "reform" would retain an unbundled capacity obligation for load serving entities, although with the obligation met through bilateral contracts rather than a centralized auction. Ultimately, retail end users' bills would still be burdened with charges for capacity, thus solving little.
Under APPA's plan, RTOs would determine and implement overall resource adequacy standards applicable to LSEs within the RTO footprint. States would have "substantial input" into RTO development of regional transmission plans and regional resource adequacy requirements.
States would establish resource acquisition processes to secure a diversified portfolio of generation and demand-side resources for state-regulated investor-owned utility (IOU) LSEs. "In retail choice states, competitive procurements, including consideration of both LSE self-build/self-supply and third-party supplier options, would be conducted for state-regulated IOU LSEs, with an option for locally regulated LSEs to participate," APPA said.
APPA also attacked the use of short-term full requirements auctions to procure SOS supply, claiming that these auctions peg wholesale bilateral prices to RTO spot prices and hinder other customers' ability to contract bilaterally.
Without consideration to which SOS structure is best for the retail customers of SOS providers, APPA presumes to reform SOS by allowing the incumbent LSE to purchase or build generation facilities or enter into longer-term (e.g., 5-15 year) power supply arrangements
APPA said that this would impose "needed discipline on the wholesale market," however, its concern with SOS appears to be with designing an SOS structure that lowers wholesale rates for unrelated customers in the wholesale market (e.g. other public power LSEs), rather than SOS retail customers.
Indeed, it's unclear how having more LSEs compete for long-term supply contracts, as would occur under APPA's portfolio approach, would lower long-term contract prices, since there would be exponentially more long-term demand for supply, which would allow suppliers to raise prices to meet such increased demand. Conversely, removing all of the SOS providers from the short-term full requirements market would seemingly lead to a cratering in short-term contract pricing, benefiting non-SOS providers (public power entities) by allowing such non-SOS providers to obtain short-term service at favorable prices due to the lack of SOS demand for such contracts.
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