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Regulators' Forum: A Fight Over Market Design

FERC's attempt to standardize markets have some state regulators up in arms.
Fortnightly Magazine - November 15 2002

the feedback we are receiving through this process. . . In some cases, we may not have been clear enough in explaining SMD. In other cases, we are open to alternative strategies that support our goals.

What do you want to say to the commissions, particularly in the South and West, who are reluctant to endorse the SMD?

We are listening. We've heard their concerns, in particular the need to maintain low-cost power, avoid cost-shifting, and protect native-load customers. We've proposed a number of safeguards for customers in the SMD. The entire package includes checks and balances that were created to safeguard the long-term interests of all participants in the market.

We've framed the proposal so that most power will continue to be bought and sold through long-term bilateral contracts. This is a key lesson learned from California, which saw its market implode after requiring its utilities to buy all their power requirements from volatile spot markets…

Another issue of concern to state regulators is how to pay for transmission lines needed in support of new merchant power plants … The SMD proposes that independent transmission providers allocate the cost of new transmission lines to those who will benefit from them.

We're also aware of state concerns that robust wholesale markets for electricity may limit energy deliveries from the generator to native load. However, our SMD proposal allocates congestion revenue rights, or CRRs, to native load through the power providers serving retail customers. As a result, SMD would allow native load to secure its transmission service. In the future, if CRRs are auctioned off, the load-serving entities would receive all sales proceeds on behalf of native load…

This flexible approach will allow states to consider options that reflect regional values and offer environmental benefits.

Of course, states have a pivotal role in regional planning for new infrastructure. Our proposed rule acknowledges that states have jurisdiction over transmission siting, resource planning and retail customer demand response programs. State and federal regulators need to work together to develop this new market framework, and assure benefits for all customers.

How do you feel about regional variations to SMD?

Recent experience has shown how opportunities for market manipulation arise whenever interconnected markets operate under different market rules. The SMD represents FERC's fulfillment of its statutory responsibility to tackle market inequities. The only way to do this is to create uniform market rules that everyone must abide by. Standard market rules will go a long way toward eliminating "seams" between regions, which are a major problem. These seams represent both opportunities for market manipulation, and stumbling blocks to the creation of efficient markets.

But at the same time, we recognize the real differences in energy markets in different regions of the country. We've built in flexibility to allow for regional variations, as long as general principles are adhered to. We are open to considering other variations of our plan, provided that it fits the overall objectives that we have laid out. Our approval of the RTO West plan is an example of the flexibility that we believe