FERC needs to dust off and review its landmark gas restructuringrule, Order 636, to get to the root of many of the reliabilityproblems in the bulk power market, say industrial power customersand a utility/marketer.

The Commission recognized “so astutely” in Order 636 thatcomparability of service and pricing for similarly-situatedcustomers was the “linchpin for overcoming both competitive andreliability challenges” in the natural gas industry, saidaffiliates Dynegy Power Marketing, Dynegy Power Corp. and IllinoisPower Co. That “piece of the puzzle,” however, is missing from thewholesale power market.

Order 636 “engineered…..a comprehensive retooling of thenatural gas market,” giving customers access to sufficient suppliesof gas at reasonable prices, the Dynegy affiliates said, but thatwasn’t the case in Order 888. FERC “cannot postpone any longer theimplementation (or at least a fuller discussion)” of initiatives toassure similar access and sensible prices for electric customers,they noted.

Likewise, the Electricity Consumers Resource Council (ELCON),which represents industrial power customers, believes FERC “shouldgo beyond mere behavioral rules for checking the discriminatoryconduct of transmission owners by adopting the electricityequivalent of Order 636.”

Specifically, the Commission should “respond affirmatively” to aMarch 1998 filing in which petitioners proposed that FERC “divorce”regulated transmission owners from their affiliated merchantoperations, forcing the merchant facilities to “seek and obtaintransportation pursuant to identical rules…..that govern allother shippers,” ELCON said.

Imposing this Order 636-like strategy in the electric industry”is even more essential because the degree of vertical integrationof the incumbent utilities makes the incentive and opportunity todiscriminate much greater than it was in the less-integratednatural gas industry,” the industrial group said.

The Dynegy and ELCON comments were in response to theCommission’s two-part request in May for industry suggestions onshort-term and long-term initiatives for enhancing the reliabilityof the power grid. Industry comments on improving reliability inthe short term were due in early June, while the deadline forproposals addressing long-term reliability was last week [EL00-75].

Dynegy and ELCON cautioned the Commission against looking toregional transmission organizations (RTOs) as a cure-all forreliability problems. RTOs “are not the panacea to the industry’sills…..[E]ven if the Commission mandated RTO formation, it wouldstill fall well short of addressing the market disparities and thefundamental inequities resulting from the lack of comparable accessto transmission service for all market participants,” the Dynegyaffiliates noted. For instance, they said RTOs would do little tostop transmission owners from hiding their “discriminatory behaviorbehind the cloak of native load.”

FERC’s prior policy on independent system operators (ISOs) andits voluntary rule on RTOs are failing, contends ELCON.”Reliability problems (and irrational pricing conditions) are justas (if not more) endemic of existing ISOs than regions that are notserved by ISOs.”

In a white paper filed at FERC, the Electric Power SupplyAssociation (EPSA) cautioned the Commission against letting RTOsactively involve themselves in competing generation markets, sayingthis could further jeopardize the “reliability and stability” ofthe markets in the long term. RTOs should stick to operating theirtransmission system in a reliable, non-discriminatory manner, thegroup said.

Unfortunately, however, nearly all of the existing ISOs — theCalifornia ISO, the PJM Interconnection, the New England ISO andthe New York ISO — “have shown that they are inclined to take ona significant role in power markets, which can preempt privatemarket development,” the group of energy suppliers noted. Theirintervention is mostly seen in the form of price caps ongeneration, EPSA said.

In fact, every operational ISO has invoked price caps thissummer. “Price caps mute price signals that would generate capitalto build generation. Indeed, the mere rumor that the Commission wasconsidering national price caps for generation a few weeks agocaused an almost $8 billion exodus in capital from generator stocksin two days,” the Dynegy affiliates noted. Dynegy stock was amongthose affected by the rumor.

While FERC has given industry “some guidance” on the issuesinfluencing reliability, “some of it is dated, some of it issketchy, and some of it is unclear and subject tomisinterpretation,” the Dynegy affiliates said. “Fortunately,however, serious (and surprisingly candid and progressive)discussion on these issues is taking place as market participantsmeet to decide their RTOs. Indeed, momentum is growing in someparts of the industry to move decidedly away from contract path,after-the-fact pricing [for transmission] and to a model wherepower can be bought and sold in a forward market through the use ofhedging tools that provide price certainty. These discussions areoccurring largely without the benefit of Commission participation.”

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