The critical policy need facing FERC and the power industry in the context of the pricing of must-run generating units is not the mitigation of market power, but rather the correction of market flaws that “create persistent underrecovery” of costs by needed investment, both existing and new, Steve Corneli, an NRG Power Marketing Inc. executive, said last Wednesday.

Corneli said that these market flaws, if left uncorrected, will threaten reliability, the future of a competitive electric industry and increase consumer costs. “These are problems that should concern everybody in this room — no matter what side of the market they sit on,” Corneli added.

He made his comments at a FERC-sponsored conference examining broad general principles for pricing of must-run generating units and the general framework the Commission should use to address this issue. The conference included perspectives from key industry experts and market participants on local market power mitigation and reliability must run (RMR) issues.

“It’s increasingly clear that aggressive mitigation is not really needed to prevent generators in constrained areas from exercising market power and creating monopoly rents,” the NRG official went on to say. “In fact, if there’s one lesson from the Commission’s very interesting experiment in PUSH [peaking unit safe harbor] bidding in Connecticut and Boston, this is it.” Generators were allowed to “bid at much higher levels than they ever had before, and yet they were unable to recover their fixed cost,” Corneli said.

Market power is associated with “extraordinary profits” and barriers to entry. “Market design flaws that we’re seeing — particularly in NEPOOL — are associated with extraordinary losses and barriers to exit,” Corneli asserted.

“The NEPOOL market sends price signals that tell needed generators that they should exit the market — retire or mothball — and yet the NEPOOL market rules read like the fine print on the back of a door at the Hotel California — you can check out anytime you like, but you can never leave this market.”

As long as this is the case, FERC “will have to recognize that both existing and new investments need out-of-market mechanisms to recover fixed costs. The clear message is to allow fixed-cost recovery and encourage a rapid move to correction of the design flaws that have prevented fixed cost recovery. Instead of putting up a fence to keep the guests from leaving, it would be much better to put up a market design platform that makes generators want to get in, rather than get out.”

Bob Ethier, ISO New England’s market monitor, told the conference that New England has a “clear market design problem. We recognize that, we’re working very hard to solve that problem.”

Ethier said that the design problem is evident “because we have units in areas that are critical for reliability, but want to retire.” He said that “if the units that you really need to have around aren’t incented to stay around in the market,” then an evaluation of how that market design is structured needs to be done.

One of the lessons learned from New England’s markets is that “local market power mitigation does not stand on its own. You can’t talk about it in isolation from the rest of your market design. That it’s really integral to your market design, just like a capacity market may or may not be, just like reserve markets, just like a locational energy market.”

As for PUSH bidding, the region’s current local market power mitigation measure, Ethier said that “We frankly learned a lot from that, and I hope all the ISOs have learned a lot from that mechanism. It was, I think, probably the appropriate policy decision at the time, given the constraints that we were facing, but it is not a long-run solution in my view.”

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