In an effort to lower electric bills and increase benefits to consumers, a municipal power group last Wednesday called on FERC to restructure regional transmission organizations (RTOs) by keeping the functions that work well while cutting or substantially scaling back those RTO functions that don't.

The positive RTO functions include ensuring that all buyers and sellers have open access to the transmission system, simplifying regional transmission rate structures and supervising regional transmission system operations, the American Public Power Association (APPA) said in a 35-page white paper, titled "Consumers in Peril."

But the group cited a number of dysfunctional features of RTO-run centralized markets, including 1) prices for power sold under bilateral contracts (individual contracts between a buyer and a seller) have been substantially influenced by the high prices sellers can obtain in the RTOs' centralized markets; 2) RTO-run, bid-based markets create incentives for generators to withhold capacity and boost prices, and to refrain from building otherwise-needed new generation capacity; and 3) electric consumers are paying billions in additional charges required by new RTO-run locational capacity markets, but it is "highly uncertain" that these markets will support future development of enough new generation facilities to meet demand.

Specifically, the APPA proposes that FERC restructure full "Day 2" RTOs (RTOs with full centralized power supply markets) into more streamlined "Day 1" RTOs. "This proposal is designed to keep what is working relatively well in RTOs, namely the 'Day 1' transmission-related functions, but to streamline and ultimately replace those functions and features -- mostly associated with RTO-run centralized power supply ancillary service and locational capacity markets -- that have failed to produce sufficient benefits for consumers," the group said.

In late January, the PJM Industrial Coalition, Mittal Steel USA and others also asked the Federal Energy Regulatory Commission to substantially redesign the "Day 2" organized markets.

The Electricity Consumers Resources Council (ELCON), which represents industrial power customers, supported APPA's proposal. "The RTO concept was designed to ensure that the electricity grid is run in an open and nondiscriminatory manner...Instead, the RTO concept has 'morphed' into a master market operator which is burdening consumers," said ELCON President John Anderson.

Until fundamental market reforms can be implemented, the APAA urged the Commission to take several immediate steps to provide electric consumers with some relief. It proposes that RTOs be required to demonstrate that new markets or programs provide net benefits to consumers, improve the governance of RTOs to make them more responsive to consumer concerns and provide for truly independent market monitoring. FERC already is exploring some of these changes in a notice of proposed rulemaking (NOPR) issued last month.

The APPA white paper came on the heels for the Commission NOPR that outlined several potential reforms to improve the competitive operations of organized wholesale power markets. The NOPR reforms addressed four major areas: demand response and pricing during power shortages; long-term power contracting; market monitoring policies and information sharing; and the responsiveness of RTOs and independent system operators (ISOs) to their power customers (see NGI, Feb. 25).

The APPA, ELCON and 39 other power groups had asked the Commission in December to expand the scope of the proceeding to examine whether power prices in areas operated by RTOs and ISOs were just and reasonable. FERC declined to do so as part of the NOPR. At the agency's meeting in February, Commissioners Philip Moeller and Jon Wellinghoff said industry criticisms of organized markets that did not offer concrete solutions were not much help to the agency.

In response to the remarks, the APPA issued the white paper, which offers proposals for FERC to consider to improve the operation of wholesale power markets.

"The wholesale electric markets operated by [RTOs] under federal supervision have driven up electricity bills twice as fast as in regions without such markets," said APPA President Mark Crisson. "It's time for Congress and the Federal Energy Regulatory Commission to act."

Restructuring changes to the wholesale electric markets and retail electric service "were predicated on the promise that increased 'competition' would spur efficiencies, promote innovation, ensure an adequate infrastructure and, most importantly, result in lower rates for consumers. But the opposite has occurred -- restructured markets are producing higher prices (and higher profits) than one would expect in a competitive market," the APPA white paper said.

"Nor is new infrastructure being constructed. And the only 'innovation' many consumers have seen is in the new and complex market mechanisms developed to extract more dollars from them for the same basic product -- retail electric service," the paper noted.

"The centerpiece of FERC's new wholesale electric regulatory policy -- development of RTOs and their operation of centralized markets for wholesale power supply, capacity and ancillary services -- has been especially problematic," the APPA said. It acknowledged that RTOs "do provide services that have substantial value," but "these substantial accomplishments have been overshadowed by the high costs and dysfunctional nature of RTO-run centralized markets."

FERC Chairman Joseph Kelliher has dismissed claims that RTO-run markets are to blame for higher electricity prices. Instead, he said current electricity prices are being driven largely by the cost of fuels used to generate electricity, principally natural gas and coal. Moreover, Kelliher said the uncertainty about climate change policy, the prospect of change in U.S. climate change policy and state policy developments in this area have put significant upward pressure on electricity prices.

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