FERC’s sweeping proposed standard market design (SMD) for U.S. wholesale power markets could result in unnecessary rate increases in Virginia and service interruptions that would not otherwise occur under current market conditions in the state, a new report issued by the Virginia State Corporation Commission (SCC) warns.

“In reviewing FERC’s proposal, the SCC is very concerned with the bedrock issues of service adequacy and service prices likely to be available in Virginia,” the SCC said in its Dec. 30 report sent to Virginia Gov. Mark Warner and a state legislative task force last week. “If the FERC implements the proposed SMD or something similar to it, the industry — including that in Virginia — will be radically altered.”

The report said that under FERC’s proposed market mechanism, the spot price for electricity at any given point in time will be determined using bids submitted by available generators throughout the region. When transmission is constrained, FERC proposes to implement limits that may be based on the cost of the last generation unit required to serve load in the constrained area, the SCC noted.

But certain areas of the state may find themselves in load pockets that can’t be served by the full array of generators in the regional market, the SCC said. “Thus, any owner of generation in an isolated pocket could exert market power and demand prices that may prove to be unjust and unreasonable.” Without sufficient market monitoring and mitigation, “abuses could drive prices up in ways similar to those experienced in California and the Midwest.”

The SCC also said that even if the highest bid price submitted to provide power in a load pocket is warranted, it could be higher than the average blended rate that Virginians currently enjoy in the relatively low-cost electricity state.

The state commission said that an electric cooperative serving the state’s Eastern Shore has, to a degree, already experienced the financial costs of a similar pricing mechanism that is currently being used by a regional transmission entity serving Pennsylvania, New Jersey and Maryland known as PJM Interconnection.

The SCC said that states that have decided not to move to retail choice — including North Carolina and most other southern states — will almost certainly mount a judicial challenge to the FERC’s authority to impose SMD.

“In addition, it is highly likely that the 2003 Congress will have before it legislation that will prohibit the FERC from imposing the SMD on states that do not want their utilities to participate in the federal proposal.

“Also, the FERC itself, in response to mounting criticism, might alter the proposed SMD to allow states to decide whether their utilities will be part of the new SMD.”

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