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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

Northwest are placed along a single river system and "cannot be operated independently or pitted in competition with each other."

Yet they see things differently in Wyoming.

"We generally favor the Commission's LMP approach," says the Wyoming PSC.

"Although some in the West argue that an LMP approach … is incompatible with the West's historic operating protocols (particularly in the Northwest) we believe LMP is central to effectively managing congestion.

"Although it will not be a simple task, we believe that the West will ultimately reach agreement on an LMP method that substantially preserves the principles articulated by the FERC in its SMD."

Mitigating Unlawful Prices

In its SMD rule, FERC proposes four remedies to mitigate anticompetitive activity and keep power prices reasonable:

  • A bid cap in centralized spot markets to offer an overall safety net, such as the cap of $1,000 per megawatt-hour (MWh) now in place in ERCOT and Eastern grid regions;
  • A resource adequacy requirement for retail utilities, similar to the traditional reserve margin;
  • A voluntary price mitigation scheme, such as the automatic mitigation procedure (AMP) in place in the New York ISO, which compares bidding conduct to historical bid reference levels, and evaluates the impact of outlier bids on prices; and
  • Some form of must-run regime for generating plants that might exercise market power within a local area ("load pocket") plagued by transmission constraints.

Though this rule might appear simple, it has raised questions among state regulators. Should price mitigation schemes recognize the right of power producers to recover not just variable and fixed costs, but opportunity costs that reflect scarcity rents collected during periods of regional supply shortages, as FERC has proposed? Connecticut regulators say yes (with scarcity value based on the highest-cost losing bidder), but others disagree.

Some states, such as Wisconsin, call for market mitigation for bilateral trading, as well as for centralized spot markets, as FERC has proposed. In similar fashion, regulators at the Connecticut and the New England PUC association (NECPUC) urge FERC to extend mitigation beyond cases involving transmission constraints or local market power to cover situations such as extreme demand peaks, in which virtually all regional units are dispatched, and suppliers can take advantage, knowing that grid operators must dispatch nearly all bidders.

The New England regulators fear market power "even in areas free of transmission constraints," and they describe the current safety net bid cap of $1,000/MWh as "wholly inadequate" to protect consumers. Georgia regulators share that view:

"The idea of FERC imposing a system of electricity price regulation on Georgia and the Southeast where caps of $1,000 are deemed a necessary part of the FERC systems sets off alarm bells."

Nevertheless, NECPUC admits that FERC gave fair warning last fall in a case that reviewed market design in ISO New England, when it asked the ISO to explain why a safety net bid cap of $1,000/MWh would not provide sufficient consumer protection in areas without transmission constraints. .

Policy disagreements can emerge even in regions with a lot of spot market experience.

In PJM, for example, market rules trigger