A new theory on capacity markets and the missing money.
Bruce W. Radford is publisher of Public Utilities Fortnightly. Contact him at firstname.lastname@example.org.
On Wednesday May 7, the Federal Energy Regulatory Commission (FERC) will host a conference in Washington, D.C. that might prove extraordinary. The commission staff promises not only to review the forward capacity markets now operating in New England and PJM—each a story unto itself—but also to discuss a new rate-making theory that has come virtually out of nowhere and which proposes to help solve the notorious “missing money” problem (see sidebar, “I’ll Take the Blame.”)
This new theory, thought up essentially by one person (a utility lawyer, no less), seeks to harness recognized quirks in predictive human behavior to better define and manage the most important single financial risk in the electric industry today. That risk, present in all areas of the country where independent power producers are active, concerns the fixed costs (financing, construction, site permitting, etc.) of adding new generating capacity to the power grid. The risk remains pervasive because, for political reasons, the market operators at RTOs and ISOs (with exceptions in Texas and the Midwest) generally prevent peak-period energy prices from rising high enough above marginal operating costs for power-plant owners to recoup all or even a portion of their fixed costs.