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Some want a tighter grip on generators, but FERC should steer clear.
Fortnightly Magazine - October 1 2001

greater demand-side response to market prices should become a federal priority. It should become part of the debate in Washington about what the federal government can do to promote a more efficient and competitive energy economy.

Ex Ante Price Mitigation. Commissioner Massey expressed some fascination with the measures that the commission has approved on a temporary basis for the New York ISO. Still, before proceeding down this path, one should look at what has happened out West, where the mitigated price is not set until just before delivery. That practice created general confusion in the wholesale power market. Some would say it has reduced liquidity. 12

RTO Participation. On the face of it, this criterion would appear to apply only to generators affiliated with transmission-owning utilities. Still, could it mean something broader? For example, while Commissioner Massey was unclear, was this a reference to a condition that a seller would be entitled to market-based pricing only if it sold its output into markets administered by an RTO? If so, this gets us back to the debate over centralized versus decentralized markets. (Remember the "Poolco versus Bilateral" debate?)

Pat Wood's Reaction

FERC Chairman Wood has expressed support for Commissioner Massey's approach and also has expressed interest in using MBR authority as a "carrot" for getting generators to make other commitments that would strengthen markets. In particular, he has mentioned a need for infrastructure, specifically generation and exchanges.

That said, the commission nevertheless should be selective in using MBR authority as a "carrot" for strengthening markets. The incentives should motivate results that truly will strengthen markets, and the market enhancements that are a condition for receiving MBR authority should be things within the control of the entities seeking such authority.

For example, if there is any crying need for infrastructure in the electric power industry, it is on the transmission side of the ledger, not the generation side. Yet grid expansion is not something that falls within the control of most entities seeking MBR authority. 13

Smart meters and other similar technology improvements are essential for building an infrastructure to facilitate demand side price responsiveness. But here too, the critical infrastructure falls outside the business of most firms seeking MBR authority. Linking such improvements to market-based rates would mark a questional exercise of FERC's conditioning authority. 14

Chairman Wood also has appeared strongly inclined to focus on markets instead of individual companies. He has suggested that for those markets that fail to pass the applicable screen, the commission might condition MBR authority until such time as the screen could be passed. This proposal sounds a lot like the current situation in wholesale markets in California, PJM, New York and New England, with the only question being whether the commission will ever be satisfied enough to remove the training wheels.

The Longer Term View

Regardless of the final policy choice, FERC should not allow the perfect to become the enemy of the good. And I say that not just to offer a trite excuse for mediocrity. Overly complex and burdensome market power screens could discourage