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FERC's Market Design: The End of a 'Noble Dream'

How state opposition cowed the feds and turned a powerful rule into just a set of talking points.
Fortnightly Magazine - February 15 2003

plant for the suboptimal 138-kV cost. The difference in cost … would be rolled-in or reallocated. The final [SMD] rule should allow for such modifications to the pure participant-funded structure (as part of an RTO-ITP-approved transmission plan)."

Nevertheless, regulators in North Carolina (another pro-PFT state) oppose FERC's RTO/ITP overlay as a requirement for participant funding. North Carolina sees an immediate need for a new transmission expansion policy that does not involve socialization of costs. Participant funding, says North Carolina, "is unrelated to the existence of independent operation of the transmission system … so that implementation should not depend on the existence of an ITP."

Of course, there is more going on here than meets the eye. The planned SeTrans RTO has invested a lot of planning effort in reliance on participant funding as a viable new policy to avoid forcing transmission owners to foot the bill for grid expansion designed to accommodate new local generators, only to see the local power exported out of the region.

In fact, the Pennsylvania PUC has observed that participant funding has become a two-edged sword. As the PUC explains, it sounds like a free market idea, but it can easily be turned into a weapon (a "cudgel," Pennsylvania says) against the introduction of competitive markets. Perhaps there is a little bit of that going on in the states that have embraced participant funding, yet have rejected LMP and SMD, as the Pennsylvania commission hints in its SMD comments filed Jan. 10:

"Participant funding, raised as a high-level issue primarily by some states and stakeholders in the Southern and Northwestern U.S., has been a flashpoint for criticism of the proposed standard market design. … Typically, the issue has been framed as [one] of fairness. … But the concept … may enable the remaining incumbent vertically integrated monopoly electric utility companies to disadvantage new market entrants and potential competitors.

"Incumbent utilities, having built the existing transmission grid, are likely to be entirely satisfied with its topology and transfer limits.

"Participant funding as a general principal of SMD … would enable the incumbent monopoly utility to protect its own generation business."



Learning from comments filed by state utility regulators in FERC's SMD case.

ARKANSAS-CONGESTION UP?

Notes that PJM has reported dramatic increases in congestion charges even as its bid-based market has developed, with costs rising from $53 million in 1999 to $271 million in 2001, a more than five-fold increase. Compare that situation to the recent study conducted by Charles River Associates, which estimated intrazonal congestion charges at $200 million a year for the planned SeTrans RTO, and $475 million annually for the entire Southeast region, plus an additional $260 million annually for interzonal and export congestion fees.

CALIFORNIA-BETTER BOARDS.

Warns that FERC's selection process for RTO board members could produce a "moral hazard." Notes that under FERC policy, the boards of the four existing "stakeholder" RTOs (MISO, PJM, New York, New England) have come to be made up 50 percent of former utility executives, a significant number of whom are retired. An added 8 percent had substantial utility