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ISOs as Market Regulators The Emerging Debate

Fortnightly Magazine - April 15 1998

in electric power." %n9%n To supplement behavioral constraints, the staff urged the FERC to make "appropriate structural relief a predicate for granting the authority sought in these proceedings." %n10%n Although the staff's comments do not so state, "structural relief" would almost certainly entail divestiture.

The Battle: PJM's Mitigation Plan

On Nov. 25, 1997, the FERC conditionally approved the proposal of the PJM Supporting Companies %n11%n to restructure the Pennsylvania-New Jersey-Maryland Interconnection. Shortly thereafter, PECO Energy spoke out harshly against the proposal, attacking the idea of price caps in certain circumstances for must-run generating plants.

In its November order, the FERC required the PJM Office of the Interconnection as ISO to submit a monitoring plan addressing "the potential to exercise market power within [the PJM power pool]," including an evaluation of both pool and bilateral markets and "any proposed enforcement mechanisms that are necessary to assure compliance with pool rules." %n12%n How will PJM address this requirement?

PJM's restructuring plan contemplates, but does not yet implement, market-based pricing for sales through the power exchange. As proponents of market-based pricing, the Supporting Companies have offered proposals to deal with market power associated with generating plants that "must run" to maintain system reliability.

Consultants for the Supporting Companies warned: "Those who own¼ specific generators¼ that must be run for reliability purposes under certain demand and supply conditions could, if unconstrained by contract or regulation, extract monopoly profits. The owners of such must-run generation could bid very high prices for their output, and the ISO would be forced to call on them to operate for reliability reasons even if the energy which they provide could be replaced by much cheaper sources absent the must-run constraints." %n13%n

If generation is deregulated and retail customers have choice of suppliers, owners of local must-run generation could exercise market power "because there no longer will be traditional native load and therefore no longer a requirement to supply the output of must-run generators, at cost-based regulated rates, to serve native load." %n14%n

As a solution, the Supporting Companies have proposed that when constraint relief is required (except in the case of constraints on PJM's western, central and eastern interfaces), any bids offered by generators called upon to operate for reliability purposes should be capped at one of three levels: (1) prior period locational marginal prices, (2) cost or (3) a level negotiated by the ISO and the generation owner.

PECO Energy attacked the proposal to cap rates of must-run units and claimed the PJM ISO would have "power to set the bid price for up to 35 percent of the net dispatchable generation in PJM." %n15%n It said: "Supporting companies have no legal right to offer or impose rate caps on the generation assets owned by PECO or other market participants. [R]ate cap rules¼ will provide a strong disincentive to participation by generators in the PJM Interchange Energy Market." %n16%n PECO concluded that the ISO's "highly discretionary powers... would be tantamount to delegation of ratemaking responsibility to the [ISO]," though the FERC "has no statutory authority to make such a delegation."