Flexibility is key as FERC moves toward a final rule.
Fortnightly Magazine - April 15 2003

Flexibility is key as FERC moves toward a final rule.

Since the Federal Energy Regulatory Commission (FERC) released its vision last July to standardize the rules governing U.S. bulk power markets, the nation's reaction to this standard market design (SMD) could safely be called swift and fervent.

Industry and stakeholders alike have commented on the commission's proposal. FERC deserves praise for its willingness to listen and respond. Since the original SMD proposal was released, FERC has made several statements that it plans to alter certain aspects. Most recently, the commission declared that the final SMD would not contain the provision that new transmission construction would derive from a competitive procurement process.

EEI, on behalf of its member electric companies, has been among those who have taken a keen interest in the SMD proposal. We have voiced, and will continue to voice, our opinions on this effort. If properly implemented, SMD will lead to greater price transparency and more robust wholesale electricity markets. In the end, this will benefit every electricity consumer.

In January, we presented FERC with our second set of comments on the proposed SMD. We identified the "big picture" issues-regional flexibility, state cooperation, regulatory certainty, infrastructure enhancement, participation by non-jurisdictional entities-and then outlined the goals we felt needed to be achieved within each. Our thoughts on these are listed below. We believe meeting these goals will enable the commission's proposed SMD to achieve its full potential.

Increase Regional Flexibility

Among other things, the current wholesale market is made up of transmission systems, generation resources, non-jurisdictional facilities, state regulation, regional planning institutions, and regional transmission organization (RTO) mechanisms. These vary significantly from one region to the next.

Given that regional differences are too significant to be ignored, the commission should accommodate these variations through a flexible market design and not look upon these variations negatively as a departure from standardization. This will help move SMD forward in all regions in the most expeditious manner.

With respect to regional variations in SMD implementation schedules, we're encouraged that the commission is now considering our suggestion that each region be allowed to propose its own implementation schedule. We're also encouraged that the commission has given the Seams Steering Group-Western Interconnection time to resolve various issues among the three proposed Western RTOs.

There are, of course, many other areas where regional flexibility is necessary, especially in transmission pricing, congestion revenue rights, and resource adequacy. Rather than prescribe a one-size-fits-all regime for each of these critical issues, each region should have the flexibility to meet a set of goals and principles in the manner that makes the most sense for that particular region.

Engage the States

If stakeholders must contend with opposing federal and state views on SMD, it will be difficult to move the process forward. Getting the states on board, therefore, is crucial. We urge the commission to continue its state outreach efforts.

Outreach alone, however, will not be sufficient to gain state support for SMD, especially on such critical areas as resource adequacy and transmission planning. To arrive at constructive approaches to these issues, the commission must recognize that the states and the stakeholders in the SMD process are best suited to resolving these issues on a regional basis.

We're encouraged that the commission's public statements indicate that it now plans to alter its resource adequacy proposal. In contrast to the states, FERC has very limited jurisdiction in the area of resource adequacy.

We feel the commission also needs to modify its transmission-planning proposal to recognize that many states have substantial jurisdiction in this area as well. The commission must work with the states to get a better understanding of how various state planning and resource adequacy processes work, and the statutory obligations under which state regulators act.

Overall, SMD should complement state activities, not preempt them, nor contravene state law obligations. Cooperation and coordination between federal and state authorities also is necessary to ensure that jurisdictional utilities are able to recover the substantial costs of compliance with the SMD.

Expand Transmission, Generation Infrastructure

The proposed SMD recognizes the need to expand our nation's transmission and generation infrastructure. At the same time, though, the commission's proposal contains at least two provisions that would discourage future construction.

The commission originally proposed an all-source RFP approach to transmission planning that simply would not work. A subsequent statement by the chairman in early January indicated that this process could slow down needed transmission investment and therefore should not be included in the commission's final rule. We look forward to the commission following through on this commitment.

We also recommended a regional planning approach to determining transmission needs. The independent transmission providers (ITPs) should initiate a bottom-up approach that combines all plans across the ITP market area, undertakes a preliminary regional evaluation and needs assessment, and results in a final transmission plan. Transmission owners and independent transmission companies should have the first opportunity to expand or improve their own systems. Others should have the opportunity to build if the system owners do not.

The commission also proposed mandating that existing transmission owners should not have the right to plan and expand within their existing area. Instead, they should be relegated to being builders of last resort. Given the critical need for cost-effective transmission infrastructure, we strongly urge the commission to revisit this policy.

Transmission owners and independent transmission companies must have the first opportunity to build within their footprints. Opportunities for transmission expansion must be available to all potential builders, including incumbent transmission owners, independent transmission companies, and merchant transmission.

With respect to resource adequacy, we agree with the commission that appropriate incentives are needed to develop generation resources. We support the commission's resource adequacy requirement, but the commission must address how to ensure that all load-serving entities share in the cost of providing adequate capacity to meet the reliability reserve requirements. Under the SMD proposal, the financial penalties do not eliminate incentives to free ride on the capacity commitments of others.

Encourage Regulatory Certainty

Many in the country's investment community don't see SMD as a solution to the financial market challenges that many electric companies now face. A key reason is the uncertainty that the ever-evolving nature of the SMD proposal has created.

Although the commission has made positive statements in several RTO orders that it will not overturn decisions already made, how the commission will interpret what is finally decided and what is open to change remains uncertain. The commission should make clear that approvals already obtained will not be overturned when it issues the final SMD rule.

Include Non-Jurisdictional Facilities

Finally, the commission should take all available steps to ensure that non-jurisdictional utilities (municipal, cooperative, public utility district, and federal power marketing agencies) participate in RTOs. Non-jurisdictional utilities also should meet the same SMD obligations imposed upon jurisdictional utilities. Regional wholesale markets and key SMD features such as resource adequacy and regional transmission planning simply won't work if a significant segment of the generation and transmission capacity can choose to sit on the sidelines.

A strong reciprocity obligation is fundamental to promoting strong, inclusive regional wholesale energy markets. This is especially important in the West, where non-jurisdictional entities-large federal and state government-owned utilities-control the majority of the transmission and generation.

In addition, non-jurisdictional entities, some of which are among the largest market participants in their respective regions, should not be able to gain a competitive edge by taking advantage of competitive markets while not assuming some of the obligations that go along with making these markets work.

Although we hope that non-jurisdictional utilities will voluntarily agree to participate in RTOs and urge the commission to promptly approve any such reasonable RTO agreements, the commission must enforce a strong reciprocity obligation.

As the SMD rulemaking process moves toward its conclusion, EEI looks forward to working closely with the commission, policy-makers from the states, and all other stakeholders on creating an efficient and robustly competitive wholesale electricity marketplace.

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