Back in the early days of the independent power industry, non-utility generators fought bitterly to overcome barriers that utilities erected to prevent their success. When large industrial users wanted IPPs to come and build inside-the-fence cogeneration plants, utilities tried to retain those customers with special incentive prices—prices that IPPs alleged were cross-subsidized by captive ratepayers. When such tactics failed, some utilities refused to provide backup service to departing customers, forcing them to choose between reliability and the freedom to shop. And when IPPs wanted to wheel power to customers down the road, utilities refused to interconnect them, or charged exorbitant rates for transmission access.
Arguably all these tactics were fair enough in the context of the regulatory compact; utilities spent billions of dollars building infrastructure to serve their state-approved franchises. They couldn’t just surrender the wholesale power business to a bunch of highly leveraged upstarts. In any case, given the contentious history of deregulation in the United States, it comes as no surprise that many IPPs still don’t trust the utility industry to play fair.
Over time that distrust has expanded to include not just regulated utilities, but also FERC-authorized regional transmission organizations (RTO).
A dramatic case in point: In New Jersey, IPP developer LS Power convinced state legislators that the PJM Interconnection’s capacity auction was driving up power prices in the state and making it impossible to finance the new power capacity needed to bring those prices down. As Fortnightly was going to press, Gov. Chris Christie (R-N.J.) was expected to sign legislation that would require the state to contract for 2,000 MW of new generating capacity to be built in New Jersey and offered in PJM’s auction at $0/MW—in effect subsidizing the construction of new IPPs and dumping their power into the market (see “Capacity Contest”).
Maryland is taking a similar approach, with the PSC proposing to compel the state’s investor-owned utilities to enter long-term power purchase agreements (PPA) for 1,800 MW of power capacity. The proposal resulted directly from a petition by IPP company Competitive Power Ventures, which had asked the PSC to order utilities in the state to negotiate a PPA for the company’s proposed 600 MW St. Charles combined cycle plant.
CPV won the support of Maryland Gov. Martin O’Malley, who called PJM’s capacity auction “perverse,” and urged the commission to order long-term contracts. “Maryland cannot be held hostage to the failure of deregulation and broken energy markets,” he told the commission.
But have the markets really failed? Are capacity auctions broken? Or are they just sending accurate price signals—albeit sometimes painful ones—based on locational constraints?
And in America’s hybrid-regulated, crazy quilt of a power market, how can anybody tell the difference?
In the debate over electric market competition, middle ground seems conspicuously absent.
On one side, capacity auctions are perverse and prejudicial. They’re rewarding those with the most market power, discouraging new plant development, and subjecting hapless customers to rising costs. “Economic theory would say that if you’re making a handsome profit over time, new entrants will come in and bring that price down,” says Susan Kelly, vice president of policy analysis and general counsel at the American Public Power Association. “That’s the whole idea of competition over time, but we’ve documented that it’s not happening.”
Specifically, in locations like New Jersey, Maryland and Delaware, clearing prices for capacity in the 2013/2014 PJM auction—the Reliability Pricing Model (RPM)—were 10 to 15 times higher than they were in western PJM. Yet new generating capacity hasn’t been built in Jersey or Maryland for several years—and not for lack of trying by companies like LS Power and CPV.
On the other side of the debate, price disparities across the PJM region simply reflect the forces of supply and demand within a capacity-constrained market. And in point of fact, PJM instituted locational pricing in its RPM base residual auction just two years ago—for the 2012/2013 delivery year. So it’s a little premature to say RPM isn’t attracting new power plants to the right locations. But even so, the fact that power plants haven’t been built in some states is irrelevant, because locational clearing prices are rewarding economic dispatch on a regional basis, across the PJM network.
What’s more, capacity prices are attracting investment in the lowest cost resources—e.g., demand response (DR) and efficiency—to alleviate locational constraints. PJM says RPM auctions have brought at least 13,700 MW of DR and efficiency resources into the mix (see Figure 3).
Further, proponents of capacity auctions argue that locational price disparities are appropriate, given the vastly different characteristics of urban load centers in the Northeast and the sparsely populated prairies of the Midwest. Over time, those disparities should diminish, as long as the market remains transparent.
And there, of course, is the rub.
Whether we believe in competitive markets or not, we might never know for sure whether markets are allocating resources efficiently, or whether they’re producing just and reasonable rates. Because the markets really aren’t transparent. They never have been and they never will be.
Despite all the laudable efforts of RTO architects, even our most sophisticated organized markets bear a heavy mantle of legacy regulation, policy priorities, and vested interests.
Electricity might be tradable as a basic commodity, but the business of owning and operating power plants and transmission lines is anything but simple. These are massive assets with complex technologies, huge costs and environmental footprints to match. As such, it’s naïve to think they’ll ever be separated from regulatory policies—or parochial politics like what we’re seeing in New Jersey and Maryland.
And make no mistake, parochial politics are driving the debate in those states. In particular, the New Jersey legislation seems like a case of unabashed pork-barrel politics, with the bill’s sponsor being none other than state Senate President Stephen Sweeney, whose home town of West Deptford would host LS Power’s proposed 650 MW combined cycle project. Beyond that, though, the lawmakers pushing both policies are demanding new construction within their state borders—never mind the fact that PJM is a regional market, with a regional resource adequacy planning process. And never mind the unintended consequences that result from this kind of market manipulation. All politics are local, the greater good be damned.
It’s OK, however, because in the big picture, parochial politics are simply part of the game.
It’s taken more than 30 years of complex legislation and regulation for market structures to reach their current state. Starting with the Public Utility Regulatory Policies Act (PURPA) in 1978, regulatory changes at the federal and state levels have recreated America’s wholesale power markets, while sending a host of other policy signals. One way or another, they all get priced in, and the same will be true of capacity dumping schemes in New Jersey and Maryland.
In short, the markets aren’t broken, they just take time to allocate resources efficiently; two years is hardly a sufficient test for something this big and complex. And they certainly haven’t failed, because the lights are still burning—and companies like LS Power and CPV are eager to get into them, by whatever means necessary.
It’s business as usual, just as it’s been for 30 years in America’s contentious, imperfect, quasi-deregulated power market.