The Federal Energy Regulatory Commission Wednesday moved a step closer to the creation of a unified open access electric power market, to parallel the one for natural gas, voting on the near final version of its standard market design (SMD) proposal to “remedy undue discrimination in the use of the interstate transmission system and give the nation the benefits of a truly competitive bulk power system.”

The move to rationalize the power market, set to be completed in two years, will have an impact on the natural gas market, particularly on regional demand growth and the location of power generation. Natural gas pipelines delivering to generating units in historically constrained areas of the power grid have served as a substitute for electric transmission lines. Opening up the power transmission system could allow cheaper power to migrate to those currently constrained areas, displacing the capacity. It also could mean new generation will be built closer to the fuel source rather than the marketplace because of improved power transmission access.

FERC will have a fight on its hands to make the proposed new rules stick, however. Even before the plan was outlined, state regulators had scheduled a news conference to protest, leading Chairman Pat Wood to comment at his own press briefing late Wednesday that “they need to read our order before they go talking to the press. I think that’s usually what smart people do — know what they’re reacting to because I think it’s not what people expect.”

The regulators from utility commissions in 15 states signed on to a statement protesting centralizing market governance in Washington. “Decisions about the buying and selling of electricity for consumers should be left to those who know their power systems best — regions of the country that have invested time and resources to ensure that their power systems work for their citizens. This far-reaching proposal raises troublesome issues about the appropriate balance of regulatory authority between state and federal agencies.”

“Centralized control of electricity by Washington D.C. will not benefit consumers and businesses,” said Marilyn Showalter, chair of the Washington Utilities and Transportation Commission. Obviously rankling is FERC’s call for a single tariff to apply to all wholesale transactions, including those destined for retail markets, but the Commission has U.S. Supreme Court backing for that move. The SMD “eliminates the potential for transmission owners to reserve more capacity than needed as a means of blunting market entry at wholesale,” the Commission said, citing the recent Supreme Court decision on Order 888 (see Power Market Today, March 5).

The Notice of Proposed Rulemaking (NOPR) voted out Wednesday is the near-final version of FERC’s market design proposal to unify the electric power grid nationwide. It would set a power reserve margin floor for each region of 12%, complete the drive for independent operation of transmission lines, provide a single tariff structure, give equal access to all market participants and institute a congestion management plan that will eliminate the opportunity for gaming strategies.

“The proposal marks an end to a period of state-and regional-level experimentation with competitive wholesale electricity markets, which began with the Commission’s reluctant approval of California’s market restructuring program. Today’s standardization incorporates a ‘best practices’ framework based on the experience gained from years of experimentation,” the Commission said in its order.

Commissioner William Massey hailed the new regime of “common rules of the road for all,” with a market-based approach, ensuring sufficient transmission and generation so there would be “no more California-type meltdowns.” The rulemaking was likened to the natural gas market milestone, Order 636, and follows on earlier electric restructuring rules in Order 888 in 1996 and Order 2000 in 2000.

The commissioners all stressed that the NOPR is the culmination of 10 months of consultation with industry and economic and analytical experts and review of the successes and failures of currently operating ISO systems. Nevertheless, it is not the final rule. Parties will have 75 days to comment on the 600 page document, before the Commission considers the final form of the NOPR and puts it in the form of a final rule. FERC is planning several conferences in upcoming months to solicit comments and an outreach program to state groups. The goal is to have all parts of the SMD in place across all systems by Sept. 30, 2004, or within two years after a final rule is published.

The proposed rule would:

In the SMD notice of proposed rulemaking (NOPR), FERC proposes a formal role for state regulators in regional transmission organizations (RTOs). Each RTO or other independent entity that operates the grid would have an advisory committee of state representatives. FERC believes theses committees can offer a valuable regional perspective to rate design and planning issues. Once the committees are set up, the Commission will work with them to establish protocols for deciding regional rate issues.

The state-selected regional advisory boards also will ensure adequate reserves are available. The 12% in the NOPR is the minimum, the Commission said, and states can require additional reserves. Enforcement would come through spot market penalties for participants who fail to make the necessary investments in new power generation capacity.

Wood predicted that putting transmission line management under central independent operators will “unlock a lot of capacity that we didn’t know was there.” While he began the process opposed to the LMP pricing method, he had come to the conclusion it would be impossible to “dumb down” or create a simple system for the unique electric market where power flows through the path of least resistance and there is no storage. LMP “makes economic sense,” and has a proven track record operating in the PJM Interconnection, he added.

Commissioner Nora Brownell pointed out the proposed rule has a transition plan “that is less disruptive than people might have expected.” The rule is “well-balanced, clear and provides fairness and equity where there has been none; certainty for customers, investors and market participants; recognizes regional differences; and gives the right price signals.” With it in place the industry “will get the desperately needed investment” to meet the public’s power needs.

Commissioner Linda Breathitt, while joining in the unanimous vote for the NOPR, said she was concerned that the Commission went into such detail as to who should be on the ITP governance boards. She objected to similar specificity on governance in the order approved for the California market design two weeks ago (see Power Market Today, July 18).

Breathitt said she would issue a statement with her concurring comments because she might not be around when a final rule is voted out. Breathitt, whose term ran out June 30, is due to be replaced by Joseph Kelliher, a senior adviser in the Energy Department, who has yet to be confirmed by the Senate Energy Committee.

The Commission envisions that the vast majority of power transactions will still be made under bilateral contracts. Buyers and sellers can secure transmission rights, using the CRRs to lock-in the price their path in congested areas. Pricing in the secondary market for CRRs “lets the market assign a value to the congestion that signals investment needed to relieve the bottleneck.”

While the SMD would establish a preference for CRRs, initially it would allow regional flexibility for a four-year transition period to determine whether to allocate CRRs to existing customers or auction the rights, with all auction revenues going back to customers paying an access charge.

Meanwhile, FERC believes SMD will make trading strategies used by Enron Corp. and other power traders designed to exploit and profit from flaws in California and other market designs ineffective in future wholesale markets. Central to this Commission belief is SMD’s use of locational marginal pricing to identify and manage transmission congestion costs and imbalance markets to handle load scheduling and acquisition.

Appendix E of the SMD NOPR outlines the Enron strategies and explains how the proposed market design eliminates the opportunity to exploit congestion management.

Responding to questions in a press briefing following FERC’s agenda meeting, Wood said the Commission didn’t have to do a great deal of adjusting of its design proposal in midstream in light of the national revelations over trading strategies used by Enron with such monikers as “Fat Boy” and “Death Star.”

“A lot of the changes had been made, so there might have been a couple of things we went back to just make really clear and sure we got done, but a lot of the fundamental structural fixes did kind of make the Enron memo issue shake out,” he said.

As a result of the Enron memo, which appeared to offer a blueprint for how to game energy markets in California, the Commission earlier this year ordered more than 140 energy suppliers to admit or deny whether they engaged in strategies similar to those described in the Enron memo (see Daily GPI, May 9).

Wood cited a study included in Appendix E that’s broader than just the issue of Enron trading strategies. “There are some ones that we’ve seen pop up in the more heralded markets on this coast in the past five years” that FERC has been monitoring. “Those were addressed as well. They’re just random ones across the map. A lot of them have to do with inadequate congestion management, but the bottom line there is a recognition in this rule that only vigilance and an MMU [market monitoring unit] that’s there on the ground are going to catch when people are lying.” Wood said that some of the Enron strategies “depend upon deliberate fraud and misrepresentation.”

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