A former state regulator notes serious problems in Northeast power markets, and offers remedies.
As the electric industry copes with the Federal Energy Regulatory Commission's Order 2000, the final rule on regional transmission organizations, let's reconsider the role of the RTO. How does it facilitate transmission? How does it ensure reliability? What changes are needed for today's independent system operator (ISO)?
And to gauge performance so far, why not take a look at PJM Interconnection, and the control area that it runs as an ISO? After all, few would argue that PJM has built the most successful track record of existing ISOs.
But not all is well with the wholesale pricing market within PJM. It's true that PJM has accomplished a great deal. It has become almost un-Pennsylvanian or even un-American not to praise the organization. PJM has been accessible to all participants, including environmental and consumer organizations whose opinions have not always been sought or taken seriously. But its past accomplishments will not solve emerging challenges. PJM must move aggressively to resolve these serious problems that undermine wholesale competition and reliability and threaten to harm retail competition.
Seven problems require PJM's immediate attention. For each challenge, I propose a corrective response.
1. High Prices and Volatility
From the consumer's perspective, wholesale market prices are too high in the PJM control area. They seem to be well above short-run marginal cost and perhaps the long-run marginal cost as well. In addition, the wholesale market exhibits substantial volatility and price spikes that probably harm trading and certainly harm consumers.
Potential Solution. The PJM is testing a market-monitoring unit. Will it illuminate some troubling trends that are emerging? To do so, the unit must have full access to all necessary information, and must report its findings to the public. The public's confidence in the integrity of PJM's market will hinge on the market-monitoring unit's performance.
2. A Weak Market in FTRs.
There is a large and growing imbalance between bidders seeking to purchase fixed transmission rights, or FTRs, and offers to sell them. The number of FTRs coming onto the market remains low and may even be declining slightly. The sluggish FTR market casts a serious cloud over locational marginal pricing and whether LMP serves the public interest.
Potential Solution. Any RTO, including PJM, that uses LMP for transmission must investigate whether LMP is contributing to weak forward markets and raising wholesale prices. The huge imbalance between FTR sellers and buyers is especially troubling in PJM. PJM may have to replace LMP by a form of zonal pricing that gives market participants transmission price certainty prior to transactions, unless the forward market and the market for FTRs improve. LMP cannot function without market participants having full access to a healthy FTR market, because FTRs secure price certainty in the event of transmission congestion within LMP markets.
3. Poor Liquidity in Forward Markets.
The NYMEX futures contract has seen very little trading. Wholesale and retail competition cannot be robust unless there is a transparent, liquid, and robust forward market. Again, critics of LMP have stated that the uncertainties that LMP creates would harm trading and the development of the forward market.
Potential Solution. Any RTO should have a duty to operate or facilitate power exchanges and visible forward markets. Participation in these markets must be voluntary, but the poor liquidity and price transparency in the PJM forward market threaten to undermine both wholesale and retail competition.
4. Lack of Demand-Side Participation.
The PJM market has no demand-side participation, though some may begin in June. Until consumers have mechanisms to adjust demand, neither wholesale nor retail markets can genuinely be competitive.
Potential Solution. Any RTO must have a strong duty to facilitate demand-side participation in the market. Until retail customers and their load-serving entities can adjust their demand in response to prices, the electricity market will not be competitive in any real sense. It also will not be as beneficial to the environment as it could be until demand actively responds to price.
5. High Emissions of Hydrocarbons.
This industry pollutes a great deal and is a leading cause of environmental problems. Power plants in Pennsylvania, for instance, have the second-highest emissions of SO2 and the eighth-highest of NOx. Indeed, some old, highly polluting plants that have been grandfathered from the requirements of our nation's clean air laws rightfully should be retired.
Potential Solution. It is easy to forget that part of an ISO's role should be to improve environmental performance. Any RTO should be responsible for operating or facilitating a green power exchange - a mechanism to encourage the wholesale buying and selling of renewable energy from certified plants. Ignoring legitimate public concerns about the environmental impact of our industry is done at our own peril.
6. Charges of Unfair Interconnection Rules.
Some companies seeking to build new generation have claimed that they have encountered discrimination when attempting to connect to the grid.
Potential Solution. Any RTO must have rules and processes for the interconnection of new generation that prevent new generators from having to negotiate terms and conditions of interconnection with transmission owners, which often also own generation that may be threatened. Streamlined processes for interconnection should be established for small projects of less than 10 megawatts of capacity.
7. Reliability Concerns.
The risks of brownouts and blackouts are increasing in the PJM area as in other regions.
Potential Solution. Operating reserve requirements, rather than ICAP charges, protect reliability and are indispensable. Any RTO continuing to charge consumers for installed capacity, or ICAP, should fix a date-certain for ending all ICAP charges. ICAP is a useless but expensive "product" that acts as a barrier to entering retail markets and merely increases incumbent generators' profitability. Facilitating demand-side response would help preserve reliability.
The RTO's role - in line with the industry's role - is to facilitate the provision of reasonable prices, attractive products and services, and to operate in a way that does not foul our air and water or catastrophically change the world's climate. A genuinely competitive market can serve the interests of the environment and consumers. We must finish expeditiously the task of creating that genuinely competitive market and the necessary RTOs.
The FERC's role is simply to encourage that collaborative work. But the diversity of interests and the high stakes involved make failure likely unless the FERC makes it clear that it has the will and the three votes to compel outcomes. If all participants in the process understand that FERC ultimately will mandate results, then the voluntary collaborative process will have a better chance of succeeding. F
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