(November 2008)Economic uncertainties are raising doubts over utility returns. Will regulators feel the need to consider broader economic effects when engaging in ratemaking? While...
States of Denial
Three challenges to federal authority from those unhappy with the status quo.
all in-state power plants qualify for RMR contracts. According to Blumenthal, that essentially allows “any unit to choose cost-of-service compensation and a guaranteed rate of return” (10.88 percent, as of the time his complaint was filed in late 2005).
Thus, Blumenthal has complained that Connecticut consumers face a classic whipsaw. Low-cost nuclear and coal units can sell through the market, collecting the auction price that often clears at the higher cost level of gas turbines. Meanwhile, the higher-priced units, perhaps unsure of clearing their bids, can choose to sign an RMR contract with the RTO, guaranteeing those units a cost-based rate. This perverse combination, Blumenthal says, brought about largely by Connecticut’s dearth of transmission infrastructure, requires state ratepayers in effect to pay the higher of market and cost-based rates. This regime, he argues, virtually guarantees that in-state retail rates will be unjust and unreasonable.
FERC’s order denying the complaint leaves a lot to be desired. Rather than cite concrete facts to justify New England prices as just and reasonable, the commission appeared to say only that the regional tariffs under attack were all lawfully approved, and thus were unassailable under the filed-rate doctrine. Blumenthal since has filed a request for rehearing, which still was pending at press time.
The New England market has its supporters of course. ISO-NE argued, for example, that during the 12 months preceding its answer to the complaint, the average LMPs in the Connecticut load zone came in only $2.71/MWh higher than average LMPs for the central New England hub. Others, such as EPSA, argued that Connecticut’s high prices were simply tit-for-tat for the state’s having delayed in making transmission upgrades for years. Either you pay for upgrades, or you pay for energy.
The crucial point at issue is whether transmission congestion can grow so great as to invalidate an otherwise lawful market. In FERC’s order denying the complaint, the commission offered little comfort:
“When market-based rates exceed cost-based rates, it is not a market failure but rather a signal for the construction of new generation and/or transmission.”
To Blumenthal, at least, such reasoning is “entirely circular.”