Summary of FERC White Paper on Bulk Power Market Design
and Related Aspects of Senate Energy Bill No. S. 14
Introduction
On April 28, 2003, the Federal Energy Regulatory Commission (FERC or Commission)
issued a White Paper on bulk power market design in response to numerous comments it
received regarding its Notice of Proposed Rulemaking (NOPR) on Standard Market Design
(SMD) issued last summer. FERC sets forth in the White Paper how it intends to change
several aspects of its proposed SMD for its Final Rule on market design. FERC has changed
the name SMD in the White Paper to “wholesale power market platform” and states that the
Final Rule will focus on the formation of Regional Transmission Organizations (RTOs) and
Independent System Operators (ISOs). The Final Rule will also ensure that all independent
transmission organizations have sound wholesale market rules. ISOs will now have to meet all
Order No. 2000 characteristics and functions except scope and regional configuration. This
would permit the California ISO, ISO-New England and the New York ISO to continue with
modifications. It would also allow formation of a Southwest Power Pool ISO.
FERC intends to build upon the existing rules established in FERC Order No. 2000 for
its Final Rule on market design.
For example, under the Final Rule each RTO or ISO would
have an independent market monitor for the individual RTO or ISO or for a larger region. This
was not required under Order No. 2000.
Market power mitigation measures would at a
minimum include rules limiting bidding flexibilities where there is localized market power. The
tariff of the RTO or ISO would also include clear market rules designed to prevent market
manipulation strategies.
While it appears that FERC conceded several points of its SMD in response to its critics,
(in particular claiming jurisdiction over the rates for bundled retail transmission service and the
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requirement to utilize locational marginal pricing (LMP) for congestion management), upon
closer inspection of the White Paper, it appears that FERC has not really conceded much at all
since it has incorporated certain backstops into its reconfigured SMD proposal. For example, if
a regional state committee for an RTO or ISO is unable to reach a decision on a certain issue,
the RTO or ISO is required to file its own proposal with FERC.
Related Aspects of Senate Energy Bill No. S. 14
It is important to note that after the release of FERC’s White Paper on market design, a
comprehensive energy bill (bill) cleared the Senate Energy and Natural Resources (ENR)
Committee on April 30, 2003. The bill would send the FERC’s proposed SMD back to the
Commission on remand and prohibit the FERC from making any related rules or orders until at
least July 1, 2005.
According to Senator Pete Domenici, Chairman of the Senate ENR
Committee, though the Commission dropped several controversial issues of SMD in its White
Paper, the White Paper did not help to win over members of the ENR committee.
Besides delaying SMD, the bill also bans round-trip trading, repeals the Public Utility
Holding Act (PUHCA), establishes a mandatory electric reliability organization, and obliges
FERC to set up an electric information system for public access to the availability and price of
wholesale electricity and transmission.
The bill also calls for FERC to discuss with state
regulators whether competitive markets and RTOs are working in their regions and the potential
to phase-in RTOs. It is important to note that the bill retains a utility’s obligation under the
Public Utility Regulatory Policies Act of 1978 (PURPA) to purchase power from a qualifying
facility until such time that the wholesale and retail markets are demonstrated to be competitive
and are certified by the FERC.
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In addition, the bill directs FERC to ensure that load-serving entities (LSEs) can protect
their native load by allowing them to use their firm or financial transmission rights (FTRs) to
meet their service obligations. This provision of the bill ensures that transmission rights will
follow the load. For example, if an LSE’s service obligation is transferred to another LSE, the
successor LSE would be entitled to use the firm transmission rights associated with the
transferred service obligation.
The bill heads to the Senate floor on May 5, 2003 and is expected to be debated for six
weeks. The bill may or may not be passed as currently proposed. Though passage of the bill
by the full Senate with the provision to delay SMD intact would slow implementation of market
design on a national scale, the bill more than likely will not affect progress at the Midwest
Independent System Operator (MISO) or in other regions where RTOs and ISOs already exist.
However, the bill may delay market design implementation until at least 2005 in the Southeast
and West where there is significant opposition to SMD and RTOs.
RTOs, ISOs, and Retail Transmission Rates
In the April 28th White Paper, FERC eliminates the proposed SMD requirement that
public utilities create or join an Independent Transmission Provider (ITP).
Since the
Commission recognizes that practically all public utilities have voluntarily joined RTOs or ISOs,
the Commission will direct all remaining public utilities to join either an RTO or ISO in the Final
Rule.
For the Final Rule, FERC is also proposing to drop the requirement of a single tariff for
all load (wholesale and retail). The Commission has also dropped its assertion of jurisdiction
over the transmission component of bundled retail rates. However, FERC will continue its
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existing practice for RTOs and ISOs of distinguishing between the non-price terms1 and
conditions of transmission service and the rates for transmission service. The non-price terms
will apply to all users of the grid, including those with obligations to serve bundled retail
customers. The transmission component of bundled retail rates will continue to be set at the
state level.
Phased-In Implementation of Market Design and Regional Differences
As it had stated in the press months before the release of the White Paper, FERC will
permit implementation of the revised market design plan in phases and allow for regional
differences. FERC also states in the White Paper that if an RTO or ISO can demonstrate that
the costs of implementing any feature of the wholesale power market platform outweigh the
benefits, the Commission will not require implementation of the feature for that particular RTO or
ISO.
Regional State Committees
The Commission intends to change the name of Regional State Advisory Committees
(RSACs) in its proposed SMD to “regional state committees” in the Final Rule and define the
responsibilities of the regional state committees more clearly. Each RTO or ISO will be required
to provide a regional state committee as a forum for state representatives to participate in the
RTO’s or ISO’s decision making process.
The regional state committees would decide such
issues as whether the RTO or ISO would use participant funding for transmission expansion,
implement postage-stamp or license plate rates, or utilize locational marginal pricing.
1
Non-price terms and condition include matters such as reserving transmission capacity and
scheduling transmission service.
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The regional state committees would also oversee the allocation of FTRs under LMP
based on existing uses of the transmission grid. Whether to implement the direct allocation of
FTRs to customers or an auction with revenues allocated to the customers is up to the regional
state committees. The FERC is no longer proposing that FTRs must be auctioned.
Transmission Issues
FERC explicitly states in its White Paper that existing rights to transmission service will
be preserved. If necessary to meet this requirement, FERC further states that the RTO or ISO
will create counterflow FTRs in order to make the aggregate set of FTRs physically feasible. If
this results in a transmission revenue shortfall, FERC states that the shortfall could be
recovered through an uplift charge. The recovery of such a revenue shortfall has been an
especially important issue at MISO and has been heavily debated, with the MISO staff and a
number of shareholders opposed to recovering a revenue shortfall via an uplift charge.
However, other stakeholders, including industrial customers, have supported the uplift
approach.
It should be noted that noticeably absent from the White Paper is any discussion in
regard to the release of incumbent FTRs to retail suppliers under retail access. However, as
previously noted, this is currently covered in the Senate Energy Bill No. S. 14.
In addition, FERC sets forth in its White Paper that to gain access to a wider range of
supply choices, RTOs and ISOs should eliminate the payment of multiple access fees across
RTO and ISO borders. The Commission suggests that rate mechanisms to minimize cost shifts
should be used. In this context, the FERC may permit an export charge where an RTO or ISO
has a significant export imbalance with other RTOs or ISOs.
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FERC will require each RTO and ISO to have a clear transmission cost recovery policy
outlined in its tariff. The Final Rule will give substantial weight to the regional state committees
on the determination of the method that will be used to allocate costs of existing and new
transmission facilities. The Commission states that regions may differ on the extent to which
they want to rely on participant funding of new transmission facilities.
FERC’s Backstop Provisions
Some industrial customers may fear the increased decision making power given to the
regional state committees by FERC in the Final Rule. However, a backstop provision FERC
intends to include in the Final Rule may alleviate this fear. If a regional state committee of a
RTO or ISO cannot agree on a particular issue, FERC states that the RTO or ISO must file its
own proposal.
Since it is highly unlikely that a regional state committee would reach a
unanimous agreement on decisions for issues such as whether to implement LMP for
congestion management or whether to implement FTR auctions, this fear of increased decision
making power by states is somewhat alleviated by the FERC backstop provision.
Energy Markets and Congestion Management
Though FERC has dropped its proposed SMD requirement of LMP, FERC is requiring
the RTO or ISO to operate a real-time market for energy balancing as well as a day-ahead
market and an ancillary services market when the time is appropriate. The RTO or ISO will
develop detailed market rules to be included in its Commission filed tariff.
FERC will require that any real-time and day-ahead markets be designed to work reliably
with the required congestion management system. FERC states that regions should develop an
approach to manage congestion that protects against manipulation, uses the grid efficiently, and
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promotes the use of the lowest cost generation. While the Commission’s preferred approach to
congestion management is through the use of LMP, FERC states in its White Paper that other
methods may be proposed.
However, the RTO or ISO would need to demonstrate to the
Commission how the proposed congestion management system would satisfy general principles
contained in the Final Rule.
These general principles require the congestion management
system to:
Protect against market manipulation, such as experienced in the California
markets;
Promote the efficient use of the transmission grid;
Promote the use of the lowest cost generation as intended under traditional
economic generation dispatch;
Assign cost responsibility to those that cause congestion costs and assign the
benefits to those that reduce congestion costs;
Reduce involuntary transmission service curtailments, e.g., Transmission Line
Loading Relief; and
Be compatible with congestion management systems used by other RTOs and
ISOs in the electrical interconnection, to avoid creating barriers to trade among
RTOs and ISOs.
It appears that FERC is “calling the hands” of states that have opposed LMP, forcing
them to come up with alternatives to using LMP to manage congestion. Though many states
have been critical of LMP, no one has stepped forth with a workable alternative to using LMP to
manage congestion. If regional state committees cannot agree on a congestion management
proposal, FERC has included a backstop provision that requires the RTO or ISO to file its own
proposal with the Commission. Thus, in regions where states have opposed LMP, if those
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states cannot agree on a congestion management proposal, the RTO or ISO in that region
could very well file a congestion management proposal with FERC that utilizes LMP. However,
other congestion management proposals, such as that used in the ERCOT region, could be
proposed as well by an ISO or RTO.
Resource Adequacy and Regional Planning
FERC also plans to change its stance on resource adequacy and regional planning in
the Final Rule on market design. FERC will make clear in the Final Rule that state and local
governments are the decision makers in these areas and FERC’s role is a supporting one.
Nothing in the final rule will change state authority over these matters and FERC will not require
a minimum level of resource adequacy. States may decide to impose a resource adequacy
requirement on utilities serving load or opt to have RTOs or ISOs operate capacity markets.
Regardless, the FERC will require a demonstration that measures have been taken to ensure
resource adequacy.
With regard to regional planning, the final rule will direct RTOs and ISOs to develop a
periodic regional transmission plan for submission to relevant state and local siting authorities.
Certain core features (independent operation of the grid, establishment of regional state
committees and development of a regional plan) will be required at the onset of the wholesale
power market platform proposal but RTOs, ISOs and their regional state committees may work
out a timetable and budget for the implementation of remaining elements (energy markets,
congestion cost allocation and market monitoring).
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Technical Conferences and Comments
Before FERC issues the Final Rule on market design, the Commission intends to hold
regional technical conferences in the near future, to discuss with states and market participants
in each region reasonable timetables for addressing wholesale market design issues discussed
in the White Paper and ways to tailor the Commission’s Final Rule to benefit customers within
the region. The Commission will issue notices of the conferences shortly.
The Commission will also accept comments on its White Paper, though no comment
deadline has yet been set. The Commission has not provided any indication of when it might
issue a final rule.
BRUBAKER & ASSOCIATES, INC.
James R. Dauphinais
Brian C. Collins
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