Kelliher's "Believe It or Not!"

Deck: 

FERC attempts to reform competitive markets.

Fortnightly Magazine - August 2007

It’s fascinating and bizarre—a strange curiosity or shocking oddity that just can’t be explained, but may be true. It doesn’t reach the level of strangeness of the Elephant Man, or instill fear or marvel as in the stories of the Curse of the Egyptian Mummy or the lost city of Atlantis, respectively.

But the fact that the Federal Energy Regulatory Commission (FERC) actually released an advance notice of proposed rulemaking (ANOPR) in late June, on competitive markets of all subjects, has many in disbelief, including this correspondent.

At a commission meeting, even FERC Chairman Joseph T. Kelliher remarked at the oddness: “I mean, we are making proposals and we’re also seeking comments, so I think an ANOPR is an unusual thing. The last ANOPR I can recall the commission issuing was Bastille Day of 2000, when the commission issued an ANOPR on OASIS II, and that was the last.” To which Commissioner Marc Spitzer quipped: “Mr. Chairman, it’s not Bastille Day, so no heads will roll.”

But Spitzer may have spoken too soon. If there is any subject in the power industry that has ended more energy-policy careers, it is electric competition. Governors on the West Coast and East Coast, a NARUC president, and various state and federal regulators, to name a few, have had their heads handed to them over their steadfast support of competitive markets. That’s probably why senior industry watchers never expected much energy-market reform from the current contingent at FERC.

In fact, when Kelliher came to chair the commission, he was seen to have staked out more of a law-and-order mandate (in addition to implementing the Energy Policy Act of 2005), while other newly minted commissioners said they would pursue natural-gas sector reform, renewables, and demand-side management policies. These are all very safe policies from a political standpoint. This would be the “caretaker” FERC, as some have described the current commission, a throwback to an earlier era, where structural reforms would take a backseat to day-to-day operations and oversight.

That’s probably why the ANOPR and the technical conferences on wholesale competition in the last few months haven’t drawn much media attention. No one is expecting anything as momentous as Order 2000, Order 888, or Order 889 from the current FERC because of the highly contentious political environment.

In fact, one could argue that proposed energy legislation on climate change, discussions on renewable mandates, and green issues in general have taken away the spotlight from what FERC has been doing lately.

Certainly, FERC’s hearings on competition got people’s attention earlier this year, as has the commission’s work on reliability standards and enforcement (see “Cyber Standards: FERC Asserts Its Authority).

EES North America

But in respect to the industry conferences on wholesale electricity markets over the last few months, one analyst remarked that FERC had rounded up all of the “usual suspects” to reiterate much of what had been heard before.

But we don’t know who Keyser Soze is in this whole affair—the person pulling all the strings, making market competition a high-profile agenda item again. Some cynics believe it was Kelliher, who, they suspect, designed the hearings to appease the pro-competition camp prior to his re-nomination as FERC chair.

Only last year, Kelliher had been extremely neutral on the subject of market structure. While never outwardly opposing electric-market competition or the vertically integrated model, Kelliher last year, in a speech at a New England ISO conference, declared that there were four market structures in the United States—the ultimate political act to appease everyone.

Kelliher also has failed to condition merger approval on RTO membership, which has been seen as a very public retreat on FERC’s previous pro-competition efforts. Of course, Kelliher and his commission also have been very active in reforming RTOs and ISOs.

Given all this, one might find it difficult to know what to believe on whether Kelliher or his commission will be a true champion of the cause. But that’s the fun of this new “politically sensitive” FERC. The show “Ripley’s Believe It or Not!” would present fantastic stories of human endeavor that would challenge our belief of what is possible. FERC has accomplished no less a feat with its ANOPR.

No Guts, No Glory

Although FERC’s ANOPR doesn’t seek to change the world, it is quite remarkable given the political climate. According to FERC press materials, the ANOPR will help the commission identify challenges facing competitive wholesale power markets in regional transmission organizations (RTOs) and independent system operators (ISOs) and propose workable solutions to determine those areas in which the commission has jurisdiction.

In fact, if there is any question as to where Kelliher’s and FERC’s loyalties lie, it would seem to be answered by the FERC chair.

“The nation’s policy is to encourage competition in wholesale power markets and the commission’s fundamental responsibility is to protect consumers from exploitation and manipulation in those markets,” Kelliher said. “The commission relies on both competition and regulation to assure just and reasonable wholesale power prices. Today we propose a package of reforms to strengthen wholesale markets.”

Kelliher also acknowledges that “other wholesale markets are bilateral markets, where wholesale sales are made on a bilateral basis rather than through a centralized auction or exchange. The commission recognizes that these two market structures have their own distinct strengths and weaknesses, and both market structures face competitive challenges.”

The commission is seeking comment on four discrete issues in its ANOPR:

• The role of demand response in organized markets;
• Increasing opportunities for long-term power contracts;
• Strengthening market monitoring; and
• The responsiveness of RTOs and ISOs to customers and other stakeholders.

The commission reiterated that it is not “seeking to fundamentally redesign organized markets or to appropriate jurisdiction” from its state colleagues.

Putting it in perspective, according to a recent insightful Energy Legal Blog by Gunnar Birgisson, “Each of these issues relates to recent hot topics at the agency. Commissioner Jon Wellinghoff has become a vocal proponent of demand response. An increasingly acrimonious dispute between PJM management and its market monitor has drawn attention to the role of market monitors, and in particular their independence.”

Birgisson continues: “The perceived remoteness of ISO and RTO boards has brought some calls for allowing market participants greater access to the boards,” he says, “And both energy users and project developers at times call for greater use of long-term contracts to stabilize prices.”

After reviewing public comments on these topics, FERC will decide whether to issue a notice of proposed rulemaking to propose specific changes to its regulations governing power markets.

Another reason FERC may believe it has the political cover to enact changes is the recent support from its former members. On May 31, nine FERC alumni—Chairs James Hoecker, Elizabeth Moler, and Pat Wood, and former commissioners Vicky Bailey, Linda Breathitt, Nora Mead Brownell, Jerry Langdon, William Massey, and Donald Santa—circulated an open letter to policy-makers lauding the achievements of competitive electricity markets and cautioning against proposals to turn back the clock. Is this the beginning of a new movement toward more market competition? Some say seeing is believing.