Summary of FERC White Paper on Bulk Power Market Design and Related Aspects of Senate Energy Bill No. S. 14

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1 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 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 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 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 Page 1

2 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, 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, 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. Page 2

3 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 28 th 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 Page 3

4 existing practice for RTOs and ISOs of distinguishing between the non-price terms 1 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. Page 4

5 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. Page 5

6 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 Page 6

7 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 Page 7

8 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). Page 8

9 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 Page 9