One Nation, Two Markets

Deck: 

EEI’s David K. Owens seeks incremental improvements to competitive markets.

Fortnightly Magazine - April 2007

When the Federal Energy Regulatory Commission (FERC) calls a meeting, it usually has a specific objective in mind—to discuss a proposed pipeline expansion project, for example, or to examine the finer points of Federal Power Act section 203. So when FERC announced plans for the “Competition in Wholesale Power Markets Conference,” industry observers scratched their heads and wondered exactly what the commission had in mind.

The stated purpose of the event, convened at the end of February, was to gather ideas on solutions to market challenges—an open-ended agenda. And the wide-ranging conference did little to clarify FERC’s objective. But in his introductory comments, Chairman Joseph T. Kelliher seemed to suggest FERC might be considering substantial changes in power-market regulation. “We are not complacent, not resistant to change, not defenders of the status quo,” he said.

Some changes already are underway as FERC implements the recent Order 890, released just a week before the competition conference. For a front-line perspective on FERC’s policy direction, we asked one of the industry’s most prominent policy representatives, David K. Owens at the Edison Electric Institute, to provide his take on FERC’s competition conference and Order 890.

Public Utilities Fortnightly: What are we to make of the FERC Competition Conference? What do you see as the most important things to come out of it?

Owens: I see several different messages and themes, as well as next steps.

One major theme was that organized and non-structured markets can co-exist, but each has a set of challenges that can be addressed to make wholesale competition work better. The chairman and all the panelists agreed we don’t need another [standard market design].

Another theme was that in all markets, organized and unstructured, bilateral contracts play a vital role, and preserving the sanctity of contracts is very important. The recent 9th Circuit decision [PUD No. 1 of Snohomish County v. FERC, December 2006] has raised some questions about that, but the commission said it will be very supportive of long-term contracts.

Other key issues are challenges with respect to demand-side management [DSM] and renewable resources. It is very clear the commission would like to see greater penetration by DSM and renewables in both markets.

Fortnightly: John Anderson from the Electricity Consumers Resource Council suggested power generators have become too comfortable with bidding into the organized markets, and demand-response resources need a way to bid into the market to shake things up. What do you think?

Owens: At least for the organized markets, the argument was the supply-and-demand functions need to be in better symmetry. We have price signals for supply, and we also need price signals that stimulate demand response by customers.

This issue is broken into three parts. First, to the degree you want the customer to be interactive, there has to be an investment in meters. The states are the ones to approve that investment. The second thing would be rate design to get the right signals, and that also is a state role. FERC has a vital role for wholesale customers on appropriate rate design, but it’s primarily an issue for state policy-makers. The third thing is the planning issue. RTOs have a major planning responsibility in the organized markets, and in unorganized markets the vertically integrated utility is responsible for it.

There needs to be a level of consistency in coordination and cooperation between FERC and the states in planning investments in energy efficiency and DSM infrastructure.

Fortnightly: With respect to renewables, do you see a conflict between expanding renewable portfolio standard (RPS) mandates and the desire for greater competition? Wind-power facilities must be built where the wind blows, not necessarily where there are load pockets.

Owens: There is no national RPS. Right now, 22 states and the District of Columbia have RPS, and each one is different from the others. That is a big challenge for FERC. The best thing FERC can do is start a dialogue with state public utility commissions to see if they can work together to encourage renewables in a consistent way.

Commissioners recognize the importance of working with state commissions to increase the role of renewable energy. But the theme came out a little distorted. There was a viewpoint that renewables are being better utilized in structured markets, compared with unstructured markets [see sidebar, “RTOs Are Greener?”]. Jeff Sterba from Public Service of New Mexico challenged that.

The fundamental point is whether renewables have the opportunity to participate in both markets, and how we can encourage the construction of transmission to bring renewable energy from remote areas and integrate it into the grid. That theme came through fairly well.

Fortnightly: As part of that theme, FERC in Order 890 says transmission owners must provide conditional-firm services. Can your members live with that?

Owens: It’s not that problematic. The challenge our members were arguing about is that if you have a customer that needs to use the system, you also need certainty that you will be able to serve your native load.

One of the other things Order 890 did was to clarify the issue of ATC, available transmission capacity. Order 890 will seek consistency on how you determine you have available capacity for others to use, and that is important.

The commission’s planning process will be the most challenging part of Order 890. We’ll be working on some important details, and we may need more time than [the 60 days] Order 890 provides. But on balance the commission did a good job. We will see additional solutions for gaining access to the grid for renewables.