NERC’s reliability oversight is bogged down on two fronts—standard-setting and compliance oversight. Progress depends on improving unwieldy process.
Exelon's Epic End Game
Electric M&A: The merger with PSE&G may herald a new industry structure, squarely at odds with regional markets.
up to match it.
Of course, Exelon and PSE&G understand all of this. To mitigate the potential for market power, they have proposed to sell off (or swap) title to a healthy swath of fossil generation (both peaking and mid-merit, including gas- and coal-fired units). Also, they would sign contracts to sell the energy output of a good chunk of nuclear—either in long-term 15-year contracts, or in 3-year deals for rights to small, 25-MW blocks—in what is called a “virtual” divestiture.
Commenting on the proposal, consultants Peter Fox-Penner and Johannes Pfeifenberger (The Brattle Group) note how the merger likely might create a two-tiered industry. Each RTO would serve a very few mega-utilities that own dominant shares of generation and transmission, plus with a retinue of numerous, small, second-tier power producers that live off the scraps thrown off by the big boys. This prospect runs exactly counter to FERC’s vision, which calls for a multitude of equally competitive players. To assure enough players, it redesigned its merger rules in 1996 to limit company size and ownership share, giving up attempts to determine if mergers might foster ratepayer benefits.
In similar fashion, FERC has pushed successfully for locational (nodal) pricing, with market and product boundaries dictated by the architecture and loading patterns on the underlying transmission grid. In fact, as the Brattle consultants note, this atomization of products and markets can be seen gaining speed, with the recent proposal in New England to institute a locational capacity market, known as “LICAP,” with separate capacity credit prices for separate zones within the RTO. ( See “Commission Watch,” January 2005, p. 16. ) PJM’s “Reliability Pricing Model,” still under development, would accomplish much the same thing. These efforts to divide RTOs into smaller “satellite” markets make sense from the standpoint of physical grid operations. But with smaller zones come larger relative concentrations of ownership, driving the need for even stricter regulation of market share. Exelon’s end game would make a shambles of all this.
Yet what if Exelon is correct? What if huge mega-mergers are the way to go? Listen to the Brattle consultants:
“If we assume that 50,000-MW utilities are the lowest-cost service providers, [then] it is in the national interest to create more of them, not fewer.
“This, however, appears to conflict with … the Commission’s competitive market design objectives.”
Experts can measure generating capacity quite easily. But to calculate market share and then available economic capacity, they must define and analyze
a broad range of factors:
• Geographic and temporal products and markets;
• Power-plant operating costs;
• Future trends in prices for power plant fuels;
• Transmission loading, congestion, and constraints;
• Forced and unforced outage rates at individual plants;
• Regional trading patterns and import capabilities; and
• Market prices for energy and capacity across all relevant zones, seasons and hours.
Only after such analysis can regulators determine how the regional grid operators likely will deploy and dispatch power plants and resources, and whether and to what extent a particular asset owner can influence prices.
Space here does not permit a