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FERC Terminates Standard Market Design Proceeding

FERC on Tuesday terminated a standard market design (SMD) notice of proposed rulemaking (NOPR) proceeding, bringing to a close an effort first launched in 2002 by the federal agency. The SMD effort was championed by then-FERC Chairman Patrick Wood, but came under fire from various energy sector quarters and faced stiff resistance from certain lawmakers in the U.S. Congress.

On July 31, 2002, the Federal Energy Regulatory Commission (FERC) issued a NOPR proposing to remedy remaining undue discrimination and establish a standardized transmission service and wholesale electric market design to provide a level playing field for all entities seeking to participate in wholesale electric markets, while recognizing certain regional variations.

In response to the SMD proposal, FERC received extensive comments from various parties raising a variety of concerns, including the following:

The SMD plan also ruffled the feathers of Capitol Hill lawmakers. In September 2002, a number of senators grilled Wood at a hearing on whether his agency had truly listened to concerns voiced by state officials over the SMD proposal for U.S. wholesale power markets.

On April 28, 2003, in response to the comments it received on its proposed rule, the Commission issued a Wholesale Power Market Platform White Paper laying out a revised proposal for building a wholesale electric market. The Commission reiterated its overall goals, proposed a more flexible approach to regional needs and expressed an intent to focus on the formation of RTOs.

While a number of entities expressed support for certain of the changes proposed by the commission in its white paper, many entities continued to oppose the commission's fundamental goals. For example, several entities spoke out against any national one size fits all approach, even with the modifications set forth in the white paper, while others expressed concern with the ever-escalating costs of RTOs.

Still others preferred that the Commission take a more regional approach that would allow markets to develop on a voluntary basis, instead of the mandatory approach to RTOs proposed by the Commission. A number of entities also expressed concern about the proposed regional state committees, including their concern that they would have to spread their scarce resources over a multitude of forums.

"Since issuance of the SMD NOPR, the electric industry has made significant progress in the development of voluntary RTOs/ISOs (e.g., Midwest Independent Transmission System Operator, Inc. and Southwest Power Pool, Inc.)," FERC said on Tuesday.

"This has allowed interested parties, through region-specific proceedings, to shape the development of independent entities to reflect the needs of each particular region," the order went on to say. "The Commission has also indicated that it intends to consider revisions to the Order No. 888 pro forma Open Access Transmission Tariff to reflect the electric utility industry's and the Commission's experience with open access transmission over the last decade."

FERC said that given "the continuing development of voluntary RTOs and ISOs and the Commission's expressed intent to look into revisions to the Order No. 888 pro forma tariff in a separate proceeding, we have concluded that the SMD NOPR has been overtaken by events. Accordingly, we will exercise our discretion to terminate this proceeding."

But the Commission's move apparently left some industry participants scratching their heads as to what the practical effect of the SMD docket termination meant.

On Thursday, FERC Commissioners clarified that the agency's move to terminate the SMD NOPR proceeding doesn't mean that the Commission frowns on the idea of RTOs incorporating elements of SMD into their markets.

At FERC's open meeting, FERC Chairman Joseph Kelliher said that the move to terminate the SMD proceeding was done for "very pragmatic reasons." The SMD proposed rule "was issued three years ago and at this point, it's largely been overtaken by events."

He said that the order "proved to be very controversial," noting that there were "concerns in Congress about the order and we have recently decided to take a different tack. That our focus is going to be on reforming transmission policy with a goal of preventing undue discrimination in transmission service. So we're refocusing and pursuing a slightly different policy goal than the SMD proposed rule."

"On the SMD order, I just want kind of to clarify what I think you mean," said Nora Brownell, a Commissioner at the agency. "And that is that we will continue to support and give full support to the RTOs that have in fact implemented SMD or some variation of it and that this is not an abandonment of a policy where markets that have already developed, this is simply a recognition that there are alternative ways to get there and we'll be working on that."

She said that "I think that's an important message and it's caused, I think, a little confusion out in the real world about what it is that we mean."

Responding to Brownell, Kelliher said: "I agree exactly with what you said. A number of the existing RTOs have proposed to incorporate elements of SMD -- particularly New England -- and we have supported that."

Commissioner Suedeen Kelly said that "pulling the NOPR on SMD is important, particularly for the people in the West. They viewed it as mandating RTOs and as you know, they're very interested in developing regional approaches to transmission organizations, but not necessarily an RTO. And having that NOPR out there presented a chilling effect."

Kelly noted that when she previously visited the region, she said that "we were not interested in forcing RTOs. Still, having our actions speak as loud as my words is important."

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