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Reform of capacity markets should include making them voluntary, APPA tells House panel


December 9, 2013

By Robert Varela
Editorial Director

APPA’s major concern with the Federal Energy Regulatory Commission "is its ill-advised, continued support of mandatory capacity markets run by regional transmission organizations (RTOs)," the association said in a statement for the record of a Dec. 5 House Energy and Power Subcommittee hearing (see story, above). FERC "should take a more critical and holistic view of these markets, and pursue fundamental reforms that reduce the adverse impact on reliability and electric consumers, including removing mandatory requirements for participation in these capacity markets," APPA told the subcommittee.

The mandatory capacity markets "have raised electricity prices with little new electric generation capacity in return," APPA told lawmakers.

The mandatory capacity markets are not markets "in any meaningful sense of the word," but instead "centralized procurement based on a heavily administered pricing structure governed by thousands of pages of complex rules," APPA said. "In addition, because new supply development increases competition, the primary beneficiaries of the capacity markets – incumbent owners of older, less efficient power plants – have sought and received approval from FERC for the RTOs to implement new rules that create impediments to new supply."

Changes to the RTOs’ minimum offer price rules "have weakened the ability of the states to make decisions on their energy future and of public power utilities to fulfill their obligation to provide reliable electric power at the lowest reasonable cost," APPA said. The buyer side "market power" that FERC is attempting to mitigate with the rule changes "has never been demonstrated to exist."

In one example of a problematic decision, FERC found that the competitive procurement process the New York Power Authority (NYPA) conducted for a contract with the Astoria II gas-fired plant was "discriminatory" because the procurement was limited to new resources, "even though its express purpose was to replace an existing unit in a transmission-constrained area," APPA said. FERC ordered the New York ISO to replace the actual cost of capital used to finance the plant with a higher proxy cost of capital, thus increasing the plant’s offer to sell power in the ISO market and increasing costs to consumers.

Such capacity market decisions "reflect APPA’s broader concern that FERC often accepts market proposals from the incumbent generation owners that are only aimed at maintaining their revenues and reducing competition." The commission "frequently ignores the complete lack of evidence that the restructured markets operated by RTOs are actually markets in the first place or that they have provided real benefits to consumers and the economy," APPA said.

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