FERC's Market Design: The End of a 'Noble Dream'

How state opposition cowed the feds and turned a powerful rule into just a set of talking points.
How state opposition cowed the feds and turned a powerful rule into just a set of talking points.
Fortnightly Magazine - February 15 2003

How state opposition cowed the feds and turned a powerful rule into just a set of talking points.

A funny thing happened on the way to a standard market design (SMD). What began as a full-fledged rulemaking-with the Federal Energy Regulatory Commission (FERC) giving instructions and imposing deadlines on the electric utility industry-now has degenerated into little more than a set of talking points.

Talk about cold feet.

After first asking for industry reaction by Nov. 15 and weathering a storm of protest, a chastened FERC invited a second round of comments by Jan. 10, and then extended that deadline to Feb. 28. With each round of criticism, the commission seemed to lose just a little more nerve.

One state, Iowa, suggested that the SMD commits such an illegal trespass on state jurisdiction that FERC would get more mileage out of the effort if it would simply cancel the compulsory aspects of the plan. The feds, said Iowa, should convert the docket (RM01-12-000) into a so-called "statement of policy"-offering only guidance to those students who might be interested.

FERC appeared to do exactly that, when, in mid-January, it issued a press release promising yet another white paper and-more than likely-yet another re-evaluation of the plan, followed by additional rounds of constituent feedback.

In short, regulators from more than a dozen states see the plan as dead in terms of regulatory discipline.

"Profound and unjustified," say regulators from Washington state. Solves "problems that do not exist," adds Louisiana. Regulators in Arizona call SMD "a noble dream," yet one that is "unwarranted" in its expansion of federal authority.

The industry appeared to have good reason to question FERC's legal authority to promulgate a new market architecture for wholesale power transactions that would bring some traditionally state-regulated features under federal purview.

As many parties have noted in their filed comments, the Federal Power Act bars federal intrusion into questions relating to retail electricity distribution service. They have cited that point in opposing FERC's bid to seize jurisdiction over electric transmission employed in retail service and to create a tariff with a single transmission product ("network service"). That move would de-list "point-to-point" service and kill the so-called "native load preference," whereby utilities can reserve grid capacity for the future potential use of retail customers who take electricity as a fully regulated product.

Indeed, the Tennessee Valley Authority argues that Congress ratified the native load preference as late as 1992, in the Energy Policy Act (sec. 212a), when it ruled that transmission (wheeling) customers must pay all costs, including costs of new facilities required for the service. TVA argues that this provision "essentially codifies the native load preference," since any existing grid capacity that has been used or relied upon to serve native load cannot be appropriated or subordinated to the wheeling request. By contrast, FERC's SMD would bar the traditional allowance for "capacity benefit margin" (CBM) to allow for future growth of native load. Instead, FERC would "monetize" CBM and put native load at risk for future load growth, by requiring retail customers who take bundled