The Federal Energy Regulatory Commission (FERC) Mega-NOPR1 covers four topics:
1) The FERC's jurisdictional powers to implement wholesale open access
2) The FERC's proposal for electric utilities to recover "legitimate and verifiable stranded costs" from departing wholesale customers (a small fraction of all stranded investment), and its belief that states should ensure recovery on retail bypass (the much larger share)
3) A range of measures to implement wholesale open access
4) Market power in generation.
Let us focus on access and generation market power.
to Wholesale Access
The FERC begins by zeroing in on the biggest single drawback of a vertically integrated electric utility industry: "[M]arket power through control of transmission is the single greatest impediment to competition. Unquestionably, this market power ¬ can be used ¬ to block competition ¬ [or favor] a transmission owner's own generation."
The FERC also notes that control of transmission can unfairly depress purchase prices from neighbors who have no alternative outlets.
The guts of the proposals are set out in pages 87 through 138: "[To] ensure that all participants in wholesale electricity markets have nondiscriminatory open access to the transmission network, transmission owners must offer nondiscriminatory open-access transmission and ancillary services to wholesale sellers and purchasers of electric energy in interstate commerce. This will require tariffs that offer point to point and network transmission services2 ¬ [that] would be valuable to customers such as municipals, cooperatives, and municipal joint action agencies that supply the long-term firm power needs of members with multiple loads that are wholly or partly within a single transmission system."
To further this aim, the FERC proposes "functional" unbundling:
"[A] public utility's uses of its own transmission system for the purpose of engaging in wholesale sales and purchases of electric energy must be separated from other activities. ¬ The proposed rule does not require corporate unbundling (selling off assets to a nonaffiliate, or establishing a separate corporate affiliate to manage a utility's transmission assets) in any form, although some utilities may ultimately choose such a course of action."
Building on its ruling regarding American Electric Power Corp.'s transmission tariffs,3 the FERC requires public utilities to offer terms and conditions "comparable" to those the host utility implicitly uses (including ancillary services) in setting tariffs for its own wholesale customers.
The FERC recognizes that the transmission provider may have an effective monopoly of some ancillary services (e.g., scheduling and dispatching). Thus, it should offer the following ancillary services as separate components of the transmission tariff:
s Reactive power (em can come from the transmission provider or customer, if feasible. (In England and Wales, reactive power is currently priced on a regional basis, and we hope it will be possible to create a market based on bids.)
s Load following (em supplied from the transmission provider or customer, if feasible. (In both England and Wales and in Norway, load following is provided on a competitive market basis.)
s Loss compensation (em offered by the transmission provider, or by the transmission customer taking less power out of the system or putting more in
s Scheduling and dispatching (em supplied by the "transmission provider or other entity that performs scheduling and dispatching for the transmission provider's service territory"
s System protection (em (spinning and other reserves) to meet forced outages, to come from the transmission provider or customer (In England and Wales and in Norway, most of these services are provided by competitive bidding.)
s Energy imbalance service (em for pricing differences between quantities supplied and +/- delivered. Compared with pricing discrepancies based on competitive bids into a pool or a spot market (which is what happens, respectively, in England and Wales and Norway), this approach is crude and will lead to profitable opportunities to offer balancing services.
There is much more to the FERC's level playing field. Transmission utilities must provide all "actual or potential transmission users the same access to information as the public utility enjoys." The FERC is proposing to develop industrywide real-time information networks in a separate Notice of Technical Conference.
Furthermore, point-to-point firm-service agreements should be assignable to assist customers who "can get or must take transmission capacity now but do not actually need it until some time in the future, and customers whose need for capacity they have under contract is intermittent or suddenly declines." When capacity is constrained (theoretically), these assignable rights can improve capacity allocation by making it available for purchase by the parties who value it most.
A public utility must also offer "to enlarge its transmission capacity (or expand its ancillary service facilities) if necessary to provide transmission services." But the utility is relieved of the obligation if it has tried in good faith, which in many regions is likely to be an exercise in futility. When capacity is constrained, the next marginal user may be required to pay the incremental cost of relieving the constraint either by the redispatch cost of unloading a line or the cost of expanding capacity, which implies a first-come, first-served approach.
To get the business moving, the FERC proposes to "place generic open-access tariffs in effect simultaneously on a date certain for every public utility that owns or controls transmission facilities." And the NOPR supplies pro forma tariffs that contain the "minimally acceptable terms and conditions ¬ for point-to-point and network transmission services."
Generation Market Power
Concurrently, the FERC's standards for allowing "market-based rates for wholesale power sales require an applicant and its affiliates to demonstrate that they lack or have mitigated market power in generation and transmission." The FERC surmises that "if this rulemaking achieves [our] goals, and competition [arises] to the extent we expect, the increased competition may reduce or even eliminate generation-related market power in the short-term market [and] the need for cost-based regulation of bulk-power sales."
But the FERC is proceeding cautiously, with concern about existing plant. In double-spaced lines set off for emphasis, the FERC asks, "if existing generators still possess market power, can such market power be mitigated effectively to permit market-based rates for existing generation?" For example:
"Ought the Commission rely on rules of conduct, market mechanisms ¬ (such as bidding procedures), and monitoring as the means to curb such power market; or
Ought the Commission rely on structural reforms?"
The Justice Department is also very concerned about market power, stressing "the overriding importance of a competitive market structure."4 It advises the FERC not to approve any PoolCo proposal "unless the relevant bulk-power markets are sufficiently competitive" (em a concern that applies with equal force in a bilateral trading market. Market power from local constraints, and market power from concentration of generation have both bedeviled the market in England and Wales. Last year, the U.K. regulator agreed with National Power and PowerGen that they will collude to cap the pool price down, which is an odd market indeed.
What it All Means
Although the NOPR is a bold step, "incrementalism" is the order of the day. Thus (unlike in gas) there is no intent to break existing contracts. The FERC hopes that functional unbundling will do the trick without the need for affiliate separation, let alone corporate divestiture of generation/transmission/distribution. (It lacks authority for either move.) Reading between the lines, the FERC probably hopes the proposals will encourage voluntary divestiture, but achieving this end requires a little help on the tax front from the Internal Revenue Service and the Securities and Exchange Commission. Cautiously, the FERC asks whether its approach will "provide strong enough incentives for nondiscriminatory access without some form of corporate restructuring?" Theoretically, yes (em in a world of utilities that operate pro bono publico. But there is an obvious temptation to shift costs into transmission services, which are likely to remain de facto monopolies for some time, and will be regulated as such.
Distortions in open access are of minimal economic significance, however, when compared to the structure and regulation of the electric industry, which are markedly different from those of the gas industry. Unlike gas, where local distribution companies (LDCs) had little ownership interest in the production and long-distance transportation of gas, most investor-owned electric utilities (IOUs) and a few of the public undertakings are vertically integrated. Consequently, whereas LDCs generally had no interest in protecting the value of highly priced gas contracts, the management of an integrated electric utility can use distribution to protect expensive generation. And they can do this because, unlike gas (em where the FERC regulated the wholesale gas market up to the citygate and Order 636 effectively threw all the wholesale market open (em the FERC does not regulate the retail business of the IOUs. In consequence, a high proportion of the total generation output is protected, and the NOPR will directly impact only that part of the wholesale market that supplies IOUs, municipals, and cooperatives that have to buy generation.
The FERC has moved away from its adherence to postage-stamp, contract-path pricing to "permit a variety of proposals, including distance-sensitive and flow-based pricing," which it developed in its policy statement on transmission pricing.5 These terms are imprecise and can be stretched to include the "or" pricing already in use; zonal pricing (used in Britain and Norway); megawatt-mile pricing (used in Texas); spot pricing (used in Argentina); and the allocation of capital and operation costs of lines in a transmission system in proportion to the "use" a transaction makes of each line during "standard" periods (which applies in New Zealand). The FERC proposes no definitive "solutions," but does offer flexibility on the broad issues. Significantly, however, it has not provided any guidance on a bundle of complex issues. Namely, how are long-term access rights priced, and how is the first-come, first-served principle squared with nondiscriminatory principles and tradable rights? Above all, how are capacity rights in constraints and interconnectors to be allocated (em a problem that has been ducked for the interconnectors between England and Wales, France, and Scotland.
The FERC claims that the situation in the electricity industry "is analogous in many ways to the natural gas industry before Orders 436 and 636." So how does the NOPR compare? Gas was deregulated in a series of orders over a decade. While the NOPR does not get as far as Order 636, it goes farther in one step than any one of the gas orders did before. In doing so, the FERC has incorporated proposals that push the limits of its power on a complex board where the states and the Canadian Provinces also play, and the tax authorities and Justice Department have their part in the game. The FERC will wait to see what happens, and then try for more extensive powers, if need be. t
Alex Henney was formerly a director of London Electricity. He has been involved in competitive power systems since 1987 when he wrote Privatise Power and was involved in the restructuring of the electric industry in England and Wales. Subsequently he has advised electric companies on competitive systems in 10 countries, including the United States.
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