One way some new players in the power generation market are looking at the valuation is to separate out “extrinsic” value and apply a higher discount rate or “haircut.” An alternative approach is...
One Nation, Two Markets
EEI’s David K. Owens seeks incremental improvements to competitive markets.
When the Federal Energy Regulatory Commission (FERC) calls a meeting, it usually has a specific objective in mind—to discuss a proposed pipeline expansion project, for example, or to examine the finer points of Federal Power Act section 203. So when FERC announced plans for the “Competition in Wholesale Power Markets Conference,” industry observers scratched their heads and wondered exactly what the commission had in mind.
The stated purpose of the event, convened at the end of February, was to gather ideas on solutions to market challenges—an open-ended agenda. And the wide-ranging conference did little to clarify FERC’s objective. But in his introductory comments, Chairman Joseph T. Kelliher seemed to suggest FERC might be considering substantial changes in power-market regulation. “We are not complacent, not resistant to change, not defenders of the status quo ,” he said.
Some changes already are underway as FERC implements the recent Order 890, released just a week before the competition conference. For a front-line perspective on FERC’s policy direction, we asked one of the industry’s most prominent policy representatives, David K. Owens at the Edison Electric Institute, to provide his take on FERC’s competition conference and Order 890.
Public Utilities Fortnightly: What are we to make of the FERC Competition Conference? What do you see as the most important things to come out of it?
Owens: I see several different messages and themes, as well as next steps.
One major theme was that organized and non-structured markets can co-exist, but each has a set of challenges that can be addressed to make wholesale competition work better. The chairman and all the panelists agreed we don’t need another [standard market design].
Another theme was that in all markets, organized and unstructured, bilateral contracts play a vital role, and preserving the sanctity of contracts is very important. The recent 9th Circuit decision [PUD No. 1 of Snohomish County v. FERC, December 2006] has raised some questions about that, but the commission said it will be very supportive of long-term contracts.
Other key issues are challenges with respect to demand-side management [DSM] and renewable resources. It is very clear the commission would like to see greater penetration by DSM and renewables in both markets.
Fortnightly: John Anderson from the Electricity Consumers Resource Council suggested power generators have become too comfortable with bidding into the organized markets, and demand-response resources need a way to bid into the market to shake things up. What do you think?
Owens: At least for the organized markets, the argument was the supply-and-demand functions need to be in better symmetry. We have price signals for supply, and we also need price signals that stimulate demand response by customers.
This issue is broken into three parts. First, to the degree you want the customer to be interactive, there has to be an investment in meters. The states are the ones to approve that investment. The second thing would be rate design