In competitive power markets based on locational marginal pricing (LMP), the facts sometimes conflict with popular belief. Most notably: 1. When there’s congestion, the books don’t balance, and...
Responding to Prof. Hogan
APPA questions the benefits attributed to organized power markets.
Recently Public Utilities Fortnightly published an interview with William Hogan, Raymond Plank Professor of Energy Policy at the John F. Kennedy School of Government and “chief architect of wholesale electric market design in the United States,” according to the introduction to the interview ( see “ Bill Hogan, Unbundled ”).1 In this interview, Hogan provides his assessment of the benefits of the restructured wholesale electricity markets operated by regional transmission organizations (RTO). As noted in Fortnightly, the American Public Power Association (APPA), through its Electric Market Reform Initiative (EMRI), has conducted numerous investigations of the RTO-operated markets and developed detailed proposals for reforming these markets. The conclusions reached by these EMRI studies and the recommended reforms have been in sharp contrast to Hogan’s positive assessment of the markets. APPA therefore is responding herein to Hogan’s statements and providing public power’s perspective on the success or lack thereof of the restructuring of the wholesale electricity markets.
Electric Market Reform
In 2004, APPA’s public power utility members began to report concerns about the wholesale electricity markets operated by RTOs. Difficulties with these markets included higher than expected prices for power supply and transmission services; the virtual inability to enter into long-term contracts at prices other than those reflecting the high clearing prices available in the spot markets; the significant lack of needed investment in new generation and transmission facilities; problems with market monitoring, governance, and accountability; and the high RTO administrative and operational costs, as well as the high transaction costs of dealing with the RTOs. Such concerns led to the formation of EMRI in 2006 with the stated goals of undertaking a series of investigative studies of the RTO-operated markets and, if necessary, using the findings of these studies to develop a proposal for market reforms.
In the six years since EMRI began, criticisms of these markets have continued, despite significant drops in electricity prices. More recent concerns have centered on the RTO-operated capacity markets and recent rule changes that seek to block the entry of new, more efficient generation. A review of presentations to financial analysts by the largest merchant generation owners with existing depreciated generation units demonstrates a strong relationship between these two developments: as prices fall, merchant generators must look to the capacity markets to make up the revenue and protect their profits. As a result, there have been successful efforts to constrain supply and block new entry, raising significant questions not only about the future costs to consumers but about the ability of the RTO regions to address the impending challenges of retiring coal plants, integrating variable energy resources, and managing the complex interrelationship of the electricity and natural gas markets.
The findings of the EMRI studies raise significant questions about