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Restore self-supply option and reform capacity markets, APPA urges FERC

From the January 10, 2014 issue of Public Power Daily

Originally published January 10, 2014

By Robert Varela
Editorial Director
Restore the ability of public power and other load-serving entities in the three Eastern regional transmission organizations to self-supply their loads with their own resources, APPA urged the Federal Energy Regulatory Commission in Jan. 8 follow-up comments to a Sept. 25 technical conference on capacity markets. APPA also renewed its call for the commission to transition the RTO-run capacity constructs to voluntary, residual markets, with bilateral contracting and other tools becoming the primary method to obtain and sell resources in RTO regions (See Public Power Weekly, Sept. 16, 2013).

The commission should reinstate the protections that public power utilities specifically bargained for and FERC approved—protections that would allow them to self-supply their own loads with their own resources using their own economics, APPA said. Ironically, the very behavior that the capacity markets’ minimum offer price rules discourage might be just what the RTO-run markets need. At the technical conference, Robert Ethier of ISO-New England "opined that it would be helpful to RTO markets if there were more [load-serving entities] using such a long-term business model," APPA said. The capacity markets are artificially skewed in favor of the merchant business model with its higher risks and high returns, rather than a lower risk, more stable price paradigm, the association said.

While restoration of the self-supply provisions would be preferable, an alternative would be to require the RTOs to demonstrate that a self-supplying load-serving entity (LSE) specifically intends to exercise buyer-side market power before they could raise the load-serving entity’s capacity bid in a particular auction, APPA said.

APPA does not favor PJM’s proposal to revise the "Fixed Resource Requirement" (FRR) provisions in its tariff to make it a more feasible self-supply option.  Most public power utilities "do not have unlimited capacity resource options for self-supply and would be placed at disproportionate risk if required to meet" the self-supply criteria under PJM’s proposal, APPA said. PJM’s plan also "would send the signal that self-supplying LSEs must be isolated to prevent their business model from somehow infecting the rest of the market, by effectively ring-fencing them out of regional markets."

APPA also would not favor an effort to develop a "standard capacity market design" or institutionalization of best practices. Such an effort could "turn into an effort by generators to take the specific market rules from each market most favorable to their own economic interests and institutionalize them across all Eastern RTOs, effectively creating a ‘Franken-market,’" APPA said. As alternatives, FERC could order one or more of the Eastern RTOs to address issues of substantial concern, e.g., the need for clear market rules that adequately support self-supply and state/local resource policy decisions, or the commission could hold a series of follow-on technical conferences on specific aspects of the capacity markets, APPA said.

An overlooked question
In response to FERC asking if it overlooked any issues, APPA said that "if anything is missing from the commission’s inquiry to date, it is the foundational inquiry that the Federal Power Act ("FPA") requires the commission to undertake – are the Eastern RTOs’ capacity markets procuring the right amounts and types of capacity at just and reasonable rates?"

The Eastern RTOs "have made assertions about the success of the capacity markets that are not supported by the available data, rendering it difficult to obtain an accurate measure of the performance of these markets," APPA said. PJM claims that its reliability pricing model has procured more than 28,000 MW of new generation capacity should be taken "with a large quantity of salt," APPA said. The association cited evidence that much of the new generation was in fact constructed for reasons other than the price signals of the capacity markets. Also, consumers in PJM have have committed to pay $64 billion in capacity payments to obtain those resources. "That is a very hefty bill to pay to support this level of new resources," APPA noted.

Capacity markets are not ‘markets’ 
There was general agreement at the technical conference among the RTO and market monitor speakers "that the capacity markets that the Eastern RTOs administer are not, in fact, ‘markets’ as any layperson would use that word," APPA said. "Rather, they are administrative constructs, and elaborate ones at that." 

APPA said it was compelled to make that point "because some on the other side of these capacity market debates have attempted to paint market participants questioning the ability of these administrative constructs to assure resource adequacy as the philosophical descendants of Karl Marx." For example, when asked by an appellate judge if the capacity markets were the only sensible alternative, an attorney for the PJM Power Providers said "you have to make a decision about whether or not you believe that capitalism works, whether the markets work or whether the markets don’t work."

Rather than assailing capitalism, APPA said it "supports increased reliance on bilateral contracts and self-supply arrangements because it believes RTO capacity markets are not markets. Despite the theory behind these constructs, no one bids their marginal costs, or even their ‘missing money.’ And real markets do not have artificial price floors in the form of [minimum offer price rules]. Bilateral markets might in fact better harness competitive forces for the benefit of consumers, by requiring capacity sellers to compete directly with each other for contracts with LSEs."


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Senior Vice President, Publishing 
Jeanne Wickline LaBella

Editorial Director
Robert Varela

Editor, Public Power Daily
Jeannine Anderson

Communications Assistant
Fallon W. Forbush

Manager, Integrated Media 
David L. Blaylock

Integrated Media Editor 
Laura D’Alessandro