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ELCON Calls for Series of Fixes to Organized Power Markets

While refusing to throw in the towel on competition in U.S. electricity markets, the Electricity Consumers Resource Council (ELCON) last Monday asserted that today's power markets are plagued by a series of problems -- including an inadequate transmission grid and icy relations between federal and state regulators -- that must be fixed if restructuring is to successfully advance in the country.

"ELCON members do not want to return to the traditional cost-of-service model," said ELCON President John Anderson in a Washington, DC press briefing. "Practically speaking I don't think it can be done. We do not want to step back in time. But we do not see the path of today's organized markets as a path that is taking us closer to truly competitive markets. In fact it seems to be taking us in the opposite direction."

Anderson said that a basic structural problem in organized U.S. power markets is a lack of adequate transmission in several geographic regions. "If we had adequate transmission, we wouldn't have congestion and many of the market problems would go away. But, the reality is we will have inadequate transmission, and therefore transmission congestion, for the foreseeable future. Thus we need to address the problems that consumers face in today's markets sooner rather than later."

ELCON believes that the major problem with organized electricity markets is a lack of consumer focus, which the group said is attributable to the reliance on locational marginal pricing (LMP) and a single-price, bid-based auction.

Anderson said that the reliance on spot markets and short-term auctions, with prices for all generators determined by the supplier on the margin, means that low-cost coal-fired and nuclear base load plants receive prices set by higher cost gas-fired facilities. "The reliance on the spot market and its bid-auction system also means that customers, large and small, cannot get suppliers to enter into long-term contracts other than those tied to spot market prices. The fact that organized markets are so reliant on all embracing spot markets has an extremely negative impact on competition."

He said that the results are organized markets where -- similar to the situation in regulated markets -- "customers must take the product offered or take no product at all. There are few if any options in terms and conditions. What's offered is often not what customers want. These are not competitive markets."

ELCON believes that there are six essential preconditions to competitive markets, with the first four being:

The remaining two preconditions to competitive markets are adequate transmission infrastructure and more cooperation between federal and state utility regulators.

With respect to the transmission grid, ELCON believes that an LMP environment often creates a disincentive to mitigate congestion. Incentive rates would have to be exorbitantly high to offset this disincentive, the report said.

ELCON believes stand-alone transmission companies are much better ways to solve this problem. Each RTO's planning process must identify needed transmission and find ways to overcome the disincentives to build, ELCON added.

The group also wants FERC to condition mergers and market-based rate authority with requirements to build new transmission where needed.

"To me, FERC has a tremendous amount of authority in conditioning market-based rates," Anderson said in response to a question from NGI. "If they were to say that with the transmission constraints that are out there, there is not a competitive market, so we will not give you market-based rate authority, but if you alleviate these constraints...," FERC could then say "we believe then we will have competition, if that's the case, and we would then allow you to have the market-based rate authority."

"It's one idea for solving the problem," added John Hughes, ELCON's vice-president for technical affairs. "Market-based rate authority is not a right. No utility has any kind of right to the market-based rate authority." Hughes said that market-based rates should "only be approved when it promotes competition, not as a way of just basically stifling competition if in fact transmission constraints are preserved as a result of issuing that authority without addressing the root problems that we see in the marketplace, that the infrastructure just will not support competition."

Indeed, in its section dealing with market power mitigation and market monitoring, the report says that going forward, FERC should be "more wary" of authorizing market-based rates than it has in the past. "For example, FERC should use its authority to approve MBR [market-based rates] to order structural remedies for dominant suppliers by conditioning such approval on new investments that mitigate their local market power. Certainly as market power screens are applied, MBR should be suspended whenever a seller fails any relevant market power screen."

The report also addresses the idea that short-run marginal costs send signals for new generation investment. "This is not the role of a spot market," ELCON said. "Unlike a long-term forward contract, spot market prices do not reveal expectations of the future. In this industry the spot market should serve a balancing (i.e., reliability) function."

Pricing signals for new investments in capital-intensive industries should emanate from a forward market, the group went on to say, adding that "otherwise one would have to assume an expectation that...new investment would not result in downward pressure on future spot prices. The most effective policy for ensuring adequate and timely new generation investment is to take whatever steps are necessary to establish robust, liquid markets."

Meanwhile, the report asserts that the U.S. is hobbled by split federal-state jurisdiction. "We cannot expect to be able to achieve a more efficient, lower-cost electric industry without cooperation between regulators," ELCON said. "We challenge federal and state officials to resolve this impasse."

Anderson said that demand response programs are "a perfect example of one the problems of a failure to agree between federal and state regulators. The federal regulators have control over the wholesale market and the states have control over the retail market."

He said that "if you have demand response like we think you ought to have it -- and that is demand is treated symmetrically with generation -- and that says demand can bid in just like any other generator can bid in. Like any generator can bid in, they can bid in day-ahead and hour ahead. If there was a week ahead and a year ahead market, they could do that too, and they would get paid the same as generation, which is a big, big difference between anything that is out there now. That would be fine, but you run into the conflict between the federal and the state regulators there."

Addressing RTOs, the report said that due to political opposition, FERC "has probably gone as far as it can with creating new RTOs. The fact that other stakeholder groups share ELCON's concerns with organized markets is perhaps the most intractable barrier to further expansion of RTOs to the West and South -- or at least until those regions believe that one does not require the other. Nonetheless, some form of independent system operator is necessary to ensure reliable grid operation and support competitive procurement in the wholesale markets."

When asked to comment on Entergy Corp.'s independent coordinator of transmission (ICT) plan, which was recently approved by FERC, Hughes said, "it's pretty sad if that's the best we're going to get" in the Southeast.

"If we were going to be optimistic, it would seem to me that the way we would be optimistic on this one is to say that FERC really has a lot more behind this order than they explicitly said in the order, but that this is just a way of opening the door and then they will find that nothing that Entergy proposes for the ICT will be acceptable and trap them that way," Anderson said.

"I think the problem is the barrier that Entergy faces is its state regulators -- Louisiana in particular -- will not allow Entergy to give up operational control of the transmission system to an RTO or an ISO," Hughes added. "I think the problem is those state regulators do not see the existing ISOs and RTOs as providing any compelling benefits."

Hughes noted that he worked closely with Entergy when he was chairman of the now-scuttled SeTrans RTO effort in the Southeast. "My impression was that Entergy was hungry for LMP and an RTO and companies like Entergy make a lot of money in the organized markets because they can sell their generation at higher price than they can under cost-of-service, on average, and they understand and appreciate that. But they can't get their regulators to support that."

Anderson said it's "fair to say that we really don't know what specific motivations are behind Entergy for this proposal. We just don't have that inside information. We're more speculating from the outside."

Meanwhile, FERC staff earlier this month disclosed plans to issue a discussion paper in early May that will address staff's assessment of issues tied to long-term transmission rights in RTO and ISO electricity markets.

ELCON officials were asked to comment on whether long-term transmission rights could go a long way in resolving some of the group's concerns.

"Let me first say that a problem we have had...is that they [FERC] come up with a model and then they find that there's a problem so they put a patch on it, and then they put another patch on it...and they keep adding these patches and what you end up with is a real mess, then," Anderson responded.

He said that providing long-term transmission rights, "while a very big step in the right direction -- if they can do it, and that's a big if -- would not make the markets competitive. So it's not a matter that if they just do that, then everything's fine. Saying that, though, it would be a step in the right direction."

Anderson believes that current financial transmission rights (FTRs) "are not adequate, even for today's transmission, and they're only a year in length. I don't think there's any more than a year in length in any of the RTOs that are out there."

Hughes said that FTRs are "really risky things because they can change signs. They can become a negative revenue stream as flows change, so they're not a very stable source of revenue, and that probably accounts for the fact that they've failed miserably in incenting new transmission."

Having said that, Hughes underscored the point that "there are a lot of impediments to building new transmission. But clearly, I think the supporters of LMP and FTRs have put all their eggs in one basket on this particular feature of their market design and it's failed. So I don't personally see how a long-term FTR is really viable. It doesn't make sense. The short-term ones don't make sense."

It's worth noting that one of the 10 recommendations made by ELCON in the report is that FERC require transmission providers to offer long-term transmission rights to loads.

The report also urges FERC to immediately launch an inquiry into the "causes of the failure" of liquid forward markets to form within organized markets. ELCON said this inquiry should look at, but not be limited to, the following potential impediments to forward contracting:

ELCON also wants the federal agency to use its ongoing rulemaking in docket number RM04-7-000 to "significantly tighten" the requirements for market-based rate authority for generators that are affiliates of vertically integrated utilities. "This should include conditioning the MBR authority of holding companies that own generation and transmission on the construction of new transmission facilities that mitigate local market power."

The group also wants FERC to pursue in this docket a market mitigation policy that acknowledges that "prices" derived in any non-competitive markets are not just and reasonable and that this outcome should automatically trigger the suspension of market-based rates for any suppliers that create or contribute to this situation.

Anderson said that ELCON had not provided FERC Commissioners with a copy of the report prior to its Monday release. "We have met with each of the four Commissioners and shared with them our concerns. That was roughly a month ago."

But he also said that "I don't think that there is a single thing in this report that we have not filed formally with the FERC in one way or another over the last four to five years or maybe more. But certainly starting at about 2000 and 2001, we have made all of these points in various filings," as well as in meetings with the Commissioners and FERC staff.

"I think what's changed is I think we're tired of being ignored," said Hughes. "Nothing has really changed. There's no effort to really address the needs of the consumers. There seems to be only efforts to meet the needs of suppliers."

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