(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...
When Markets Fail
New England grapples with excess capacity and rock-bottom prices.
Connecticut regulators asked consulting firms such as London Economics to help it design RFPs to solicit capacity for Connecticut utilities using a master agreement for purchased power contracts drafted specifically to minimize liability for FCM auction payments.
The result was a structure that featured contracts for differences (CfDs) that would leave capacity sellers indifferent as to whether the contract sales prices would fall either above or below clearing prices in New England’s centralized capacity auction market. Either way, the RFP sellers would be made whole, as the DPUC explained:
“For the CfDs that settle against the ISO-NE markets, the contract will have a variable payment structure …
“If the annual contract price is above the actual market clearing price in the FCM … the Buyer will true up the Supplier … If the annual contract price is lower than actual market clearing prices, the supplier will make payments to the Buyer.” ( See, Energy Independence Act Capacity Contracts, Conn. DPUC Docket No. 07-04-24, p. 30, Aug. 22, 2007, published at 2007 WL 24150067 .)
Connecticut has defended the program as mandated by state legislation, and protected by the state action exemption to federal antitrust law. ( See, Answer of Connecticut DPUC et al., FERC Docket ER10-787, filed March 30, 2010. ) Generators, however, see it as state-sponsored price manipulation:
“It should be emphasized that the DPUC designed its RFP to artificially suppress FCM clearing prices …
“First, the Master Agreement requires bidding in a manner designed to lower the market clearing price. Second, the legally mandate bidding strategy is intended to lower clearing prices across the board by means of the ‘multiplier effect’ that this otherwise uneconomic bidding strategy would have on the market as a whole.” ( See, Comments of The Boston Generating Cos., pp. 15-18, FERC Docket ER10-787, filed March 15, 2010 .)
Yet at the same time the generators concede that such efforts by state regulators are well-motivated, often reflecting a greater public purpose, such as the reduction of risk through long-term contracting, the promotion of energy efficiency and conservation through greater demand response efforts, or reduction of carbon air emissions through via development of renewable energy.
NEPGA recognizes the dilemma for regulators:
“While intentional price suppression obviously is inappropriate, states should be free to pursue their chosen policy objectives through, for example, long-term contracts or retail programs. Designating a resource out-of-market does not imply bad intent; all [it] means is that the resource is being subsidized …
“And we expect to continue to see examples of apparently benign OOM supply. Massachusetts has just launched a $2 billion energy efficiency program and several large renewable projects may soon sign long-term contracts with load in New England.”
“Regardless whether a particular OOM resource is part of a scheme to distort prices downward or a benign effort to accomplish some other, legitimate goal, such as reducing carbon emissions, the distorting effect on FCM prices is the same.”
The independent consultant and RTO market expert Roy Shaker fears that if markets continue to welcome capacity from out-of-market resources, the result