FERC last Thursday issued a notice of proposed rulemaking (NOPR) that outlines several potential reforms to improve the competitive operation of the organized wholesale power markets.

The NOPR proposals address four major areas: demand response and pricing during power shortages; long-term power contracting; market monitoring policies and information sharing; and the responsiveness of regional transmission organizations (RTOs) and independent system operators (ISOs) to their power customers.

“We are acting because we recognize FERC has a duty to improve the competitiveness of wholesale power markets, to use the regulatory tools Congress has given us to make competition more effective,” Chairman Joseph T. Kelliher said at the Commission’s open meeting. At the same time Kelliher believes “competitive wholesale markets are operating well, and that wholesale competition policy has been a success.”

Not everyone agrees. In an immediate response to the NOPR announcement, the Electricity Consumers Resource Council (ELCON) urged the Federal Energy Regulatory Commission to expand its action to include an examination of “whether the prices in today’s organized markets are in fact just and reasonable.”

A key proposal in the NOPR would require RTOs/ISOs to give market monitoring units (MMUs) access to market data, resources and personnel necessary to carry out their duties; require MMUs to report directly to RTO and ISO boards, rather than to management; and would require market monitors to submit reportable violations and tariff violations to FERC’s Office of Enforcement and market design flaws to the agency’s Office of Energy Market Regulation.

Moreover, the proposal calls for market monitors to submit market evaluations and tariff recommendations to FERC, state commissions and other market participants, as well as file formal reports in addition to their annual state of the market reports; would require RTOs and ISOs to include in their tariffs ethics standards for MMU employees; and would remove market monitors from market mitigation to ensure complete independence.

The proposed reform is intended to improve the independence of market monitors and increase the transparency of their activities. The MMU proposal responds in part to accusations by the market monitor of PJM Interconnection that he and other colleagues were not allowed to operate independently of the RTO (see NGI, April 9, 2007).

The role of the FERC market monitors is to ensure RTO/ISO participants are complying with market rules, prevent anticompetitive behavior and to work closely with the Commission’s enforcement office. They do not take enforcement action against market violators.

To facilitate demand response, the NOPR proposes that RTOs and ISOs accept bids by demand resources to provide certain ancillary services if they meet the necessary technical requirements and the bids are at or below the market-clearing prices. It also seeks to modify RTO and ISO tariffs to eliminate during a system emergency certain charges to a power purchaser for taking less energy in real time.

The NOPR calls for RTOs and ISOs to post information on their websites to facilitate long-term contracting. It would require RTOs and ISOs to dedicate a portion of their website for market participants to post offers to buy/sell power on a long-term basis.

FERC also proposes that RTOs and ISOs allow stakeholders to sit on the boards of RTOs and ISOs, which raised the concern of Commissioner Suedeen Kelly. “I continue to disagree with that as a policy,” she said, adding that the independence of the boards was the “cornerstone” of the RTO/ISO policy.

Some industry participants have complained that competition in the electricity market is a failed experiment, and have urged FERC to return to re-regulation to tame high power prices. “But current electricity prices are driven largely by the cost of fuels used to generate electricity,” not by market competition, Kelliher said. “The cost of natural gas and coal has risen, resulting in upward pressure on electricity prices. [And] the uncertainty about climate change policy, the prospect of change in U.S. climate change policy and state policy developments in this area all [have] put significant upward pressure on electricity prices.”

Kelliher said the NOPR was not the “last word on competition policy” from FERC. “We are prepared to act [even further] to strengthen competition. We will act in individual regional markets, we will act to make improvements on a structural basis in both the organized markets and bilateral markets, and we will act on a national basis.”

The proposed reforms “represent the best ideas” that came from technical conferences last spring and written comments on the advanced notice of proposed rulemaking, which FERC issued last June.

ELCON members, which represents industrial power customers, doesn’t think the NOPR goes far enough. They “do not see these markets as competitive. There is little or no interaction of supply and demand.” Nor do they believe that the market is providing the hallmarks of true competitive markets, such as lower prices, new or improved services and improved customer focus. The power consumers said they would be more encouraged “if we believed that the federal regulators charged with overseeing those markets seemed more cognizant of the markets’ many shortcomings, rather than praising them for their supposedly competitive nature.”

FERC’s proposals would apply to the following RTOs and ISOs: PJM Interconnection, New York Independent System Operator, Midwest Independent Transmission System Operator, ISO New England, the California Independent Service Operator and the Southwest Power Pool.

Comments on the proposals are due at FERC 45 days after the NOPR’s publication in the Federal Register.

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