FERC Report Finds Bulk Power Market Flaws

California may have gotten the short end of the power stick last summer, but according to a FERC staff report, it may just have been a matter of degree days separating other regions of the country from a similar fate.

The report released this week by the Federal Energy Regulatory Commission staff on bulk power markets in the Northeast, Midwest, Southeast and Texas, following one released earlier on California and the West (see Daily GPI, Nov. 2), finds widespread bottlenecks, transmission and generation constraints, balkinization and inadequacies and congestion in the partially deregulated market. The only region the study gave good marks to is ERCOT, which is wholly within Texas, and over which FERC has little jurisdiction. The report found the Texas system is adding sufficient generation and transmission and "the ERCOT area is much less likely to encounter the sharp price spikes that have been experienced in previous years."

In the Northeast, while PJM has had a "relatively smooth" transition, the New York and New England ISOs have suffered a number of problems, which have required price intervention to contain. In New England FERC found the "lack of a workable congestion management system is a cause of significant cost to market participants without conveying a meaningful price signal to which the market can react." The FERC staff said the ISO's procedures for fixing the system have a long timeline.

Through its market structure, rules and software, New York has effectively insulated itself from other northeastern markets, which "exacerbates already tight supplies in New York," and affects the broad wholesale market as well. Price caps may be a way of life for the New England and New York ISOs during a lengthy transition. The report suggests the Northeast systems could save time and money if they shared the cost of developing a common system. FERC could set out standards for common practices and require common software or simply require a single northeastern RTO. The report also reviews the Commission's options regarding price caps for the near term.

The Midwest, including ECAR, MAIN, MAPP, and SPP, is dominated by vertically integrated transmission providers with "weak economic incentives to provide access to transmission services to third parties and strong incentives to favor their own services." Currently all bulk power transactions are bilateral, with no central clearing site. The Commission has verified individual complaints of barriers to transmission access from market participants, but a lack of data from transmission providers "prevents an assessment of whether markets are functioning efficiently.

Transmission operators have told FERC they are unable to provide export and import and peak load data for their systems. Because of this "it will be difficult for the Commission to monitor and react to market inefficiencies and problems, particularly in the active summer months, within a time frame in which quick action could be taken. This points to a gap in existing regulations regarding what information should be retained and made public in real-time to ensure that the market runs transparently and efficiently."

The Southeast, with low power costs and vertically-integrated utilities which have retained their generation assets, essentially is not open to a bulk power market, nor to independent power producers. "IPPs face significant difficulties in obtaining access to transmission facilities in the Southeast," FERC's report said. A shortage of generation and transmission facilities simply increases the prices customers pay, so the utilities have no incentive to expand. In Florida state law rules out IPPs not dedicated to retail customers.

Further, "there is no clearinghouse for electric power prices in the Southeast. Traders continue to learn prices by using telephones..price transparency is reduced because the markets have a limited number of hubs for forwards and futures contracts."

The Tennessee Valley Authority (TVA), in part because of federal law and in part through its own actions, "has acted as a bulwark against the development of competitive energy markets in the Southeast." The TVA, "critically situated between the southern and Midwest markets," and with 30,000 MW of generation, 29,000 MW of peak load, 2,500 miles of transmission facilities, poses a large barrier.

The staff report suggested FERC should standardize information maintenance and reporting by transmission providers and require them to file tariff provisions outlining a pro forma interconnection process that could be used by the Commission as a template for regions that do not, as yet have an agreed upon interconnection process.

Also, FERC "may choose to direct staff to conduct formal investigations into entities about which a pattern of complaints has emerged." The report also suggested FERC reduce the advantages of network service over point-to-point service by requiring that native load be served under the same tariff provisions as other transmission services. This would eliminate current incentives for vertically integrated transmission owners to favor their native load.

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