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Demand-Side Dreams

FERC would relax price caps—sending rates skyward—to encourage customers to curtail loads.

Fortnightly Magazine - November 2007

About four months ago, at a conference at Stanford University’s Center for International Development, the economist and utility industry expert Frank Wolak turned heads with a not-so-new but very outrageous idea.

Wolak, who serves as chairman of the Market Surveillance Committee of the California Independent System Operator, suggested if regulators really want electric customers to curtail load during shortages or emergencies to aid reliability or boost system resources, they should simply remove all bid caps, price caps, and other similar market controls. Let the price float free—maybe even as high as $100,000/MWh in a single extreme peak hour, which translates at the retail level to $100/kWh.

Now there’s the way to get some demand response.

Wolak suggests that allowing such inflated prices at the wholesale level, and then passing them along at retail to ratepayers, offers the best and perhaps only way to cure market abuses and curb market power exercised by monopoly power producers.

“Without the active demand-side participation enabled by charging final consumers prices that reflect hourly wholesale prices, electricity suppliers will face a final demand that is virtually inelastic … and implies significant opportunities for suppliers to exercise unilateral market power.”

He much prefers such scarcity pricing (letting prices climb during shortages without controls) to the current regime, which first slaps on price controls to deny revenues to power producers, and then designs complex artificial incentive schemes (ICAP, LICAP, RPM, and FCM) to recapture the “missing money” to pay them back.

Wolak presumably was speaking for himself, and not the regulators at the Cal-ISO. His paper, “Managing Demand-Side Economic and Political Constraints on Electricity Industry Re-structuring Processes,” is a compelling read.

And in offering up his paper for industry consumption, Wolak likely knew other regulators lately have been thinking along the same lines.

In particular, FERC in a recent case has now suggested nearly the same thing—relaxing price caps, offer caps, and similar market controls—to encourage greater demand response (See FERC Docket Nos. RM07-19, AD07-7, issued June 22, 2007).

In the case, FERC is exploring ideas for incremental improvements to organized wholesale power markets run by regional transmission organizations (RTOs) and grid system operators (ISOs). The case can be seen as the bookend or analog to Order 890, issued in February 2007, in which FERC ordered improvements to the Open Access Transmission Tariff (the OATT, first codified in 1996 in Order 888), which governs wholesale bilateral power transactions largely outside of RTO or ISO management.

In this companion case, FERC suggests ideas for incremental improvements to the regional power markets in four areas: demand response, long-term contracting, market monitoring, and stakeholder representation in the workings of RTOs and ISOs. Implicit in this package is the notion RTO/ISO regional markets are working pretty darn well and require only fine tuning. As FERC explained in its introductory comments: “The commission is not seeking to fundamentally redesign organized markets… Our goal is to make incremental improvements …