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Coal's Raw Deal

The bias in RTO markets, and how FERC might fix it.

Fortnightly Magazine - September 2005
would be about $80 per MWh.
 
Now pause for a moment. If the investor lived in the pre-RTO world, and paid the coal plant’s high capital cost, he’d be assured delivery of the coal plant’s $20 power, and would risk only the chance of a transmission outage, or perhaps a curtailment under TLR rules (transmission loading relief). Under this older regime, governed by Order 888 and FERC’s pro forma OATT, the coal plant, after qualifying as a network resource, could sign a contract guaranteeing physical transmission rights at a price certain over a long term, say 30 years. The transmission provider would undertake the obligation to maintain the grid network to afford source-to-sink delivery capacity to support the plant and its contract. And if redispatch or grid upgrades might ever be required to maintain delivery capacity, the plant owner would pay no more than its load-ratio share of such costs. This delivery risk was modest—quite a bit less than the energy price risk of committing capital to coal as a boiler fuel.
 
But today, in RTO markets, the coal plant developer deals with minute-by-minute congestion markups and LMPs that often reflect natural gas on margin. Now return to the letter:
 
We today can spend $1 billion on coal-fired capacity and still face the risk that our delivered energy price will reflect the $80 production cost of gas-fired capacity. We do not need to spend an extra $700 million to obtain $80 energy, but this is the risk we are required to take today under MISO rules if we invest to serve our customers in a cost-effective manner over the long term.

(For the full text of the letter, see Comments of Midwest TDUs, FERC Docket No. AD05-7, filed June 27, 2005.)

This problem occurs if a load-serving retail utility invests in a base-load coal unit but lacks FTR hedging coverage, or must pay full value to buy it. Voicing near-identical concerns are groups such as ABATE (Association of Businesses Advocating Tariff Equity), the Coalition of Midwest Transmission Customers (CMTC), and the Transmission Access Policy Group (TAPS). To quote attorney Robert Weishaar, Jr., representing ABATE and the Coalition, the investment or contracting decisions "are skewed against the coal unit."

Under typical RTO practice, neither the power producer nor the load-serving utility reserves or acquires physical transmission rights for a transaction, either short- or long-term. Instead, the payment of a regional grid access charge (a zonal "license-plate rate in the typical case) will suffice to guarantee delivery. If congestion arises, the parties simply "buy through" it. They pay the locational marginal price, and can hedge that risk by acquiring FTRs, which pay back the cost to the holder. But the cost of the hedge can eat up coal's advantage. And the FTRs will cover only short terms of one month, six months, or 12 months, at the longest. If you want a longer FTR, to hedge the 30-year useful life of your coal plant, you are out of luck.

This bias against coal has not gone unnoticed on Wall Street. In