Minimum Offer Price Rule: Simply Absurd
Originally published November-December 2012
In recent rulings that fundamentally alter the rules of wholesale electricity markets operated by regional transmission organizations (RTOs), the Federal Energy Regulatory Commission has departed from its stated mission to “assist consumers in obtaining reliable, efficient and sustainable energy services at a reasonable cost through appropriate regulatory and market means.” Instead, the FERC has channeled its support to incumbent, for-profit generators and raised a significant barrier to entry for the development of new efficient generation resources critically needed to replace aging infrastructure.
The minimum offer price rule is one of the FERC’s primary tools for helping incumbent generators in the RTO-operated markets. This rule—known in regulatory jargon as the “MOPR”—is designed to address what the commission perceives to be “buyer-side market power.”
In an egregious example of FERC’s overly aggressive implementation of an RTO MOPR, the commission in September ordered the New York Independent System Operator to revise its cost calculations for two power plants that the ISO had determined previously would not be required to increase their offer prices under the buyer-side market power rules. Incredibly, FERC said the ISO could not use the actual cost of capital for one of the power plants, known as the Astoria II plant, which had been built to serve capacity needs in New York City. The plant’s capital costs were “improperly impacted by an irregular or anomalous cost advantage,” the commission concluded. That “cost advantage” was a long-term power purchase agreement with the New York Power Authority. The agreement was procured in an open and transparent bid process, but FERC found it to be “discriminatory” simply because NYPA was seeking new generation resources. FERC’s ruling will require that the plant overstate its cost of capital, thus lowering its chance of clearing the auction.
The commission’s actions threaten not only to increase the cost of electricity for retail customers, but also to impede the construction of new, more efficient generation. A study completed earlier this year for APPA’s Electric Market Reform Initiative showed that long-term contracting and utility ownership are the primary means to obtain needed new generation in New York. These methods are now threatened by the revised MOPR.
FERC has also tightened the MOPR in the PJM Interconnection and put in place a process for similar rule changes in ISO New England following a generator backlash to actions taken by the states of New Jersey, Maryland and Connecticut to establish processes to procure long-term contracts to remedy the absence of needed new generation in their states.
In the RTO markets, all bidders are paid a single-clearing price. Therefore, new generation from these state programs could lower prices paid to all existing generators and reduce their profits. Although the market is purportedly designed to entice independent developers to build new resources in areas that are capacity-constrained, the revised MOPR greatly undermines this market goal.
The success of efforts by the incumbent generators to maintain high prices in what is supposed to be a competitive, price-reducing market has created an upside-down world for public power utilities and rural electric cooperatives with an obligation to serve retail customers. These consumer-owned utilities have operated for decades to bring reliable low-cost power to their customers on a not-for-profit basis.
One of the most problematic changes to the PJM MOPR was the elimination of a guarantee that capacity offered into the auction by consumer-owned utilities for self-supply would automatically clear. The absence of this guarantee is a fundamental threat to the public power business model.
Delaware Municipal Electric Corp. (DEMEC), a joint action power supplier, is the poster child for what’s wrong with FERC’s revised MOPR. DEMEC President and CEO Patrick McCullar testified last year at a FERC technical conference to explain the anti-competitive and anti-consumer effects of the revised rule. The agency’s members are in a highly constrained load pocket in the PJM footprint. To help contain power prices and assure supply, DEMEC in 2007 started development and in 2011 began construction of a new generator to support the needs of its member municipal utilities. After the agency completed financing arrangements, FERC ordered PJM to use the revised MOPR. Because self-supply would no longer automatically clear the market, PJM directed DEMEC to submit a cost-based justification for an offer to sell the new capacity in the RTO market below the MOPR offer price threshold. Although DEMEC submitted the true cost of constructing the plant, it found itself at risk by having to negotiate with the PJM independent market monitor to develop an “acceptable” price that would assure the agency’s capacity of clearing the market. In the end, DEMEC’s unit cleared, but it was a painful experience for all concerned. Had its new unit not cleared, DEMEC would have been forced to pay twice for electric generating capacity—first to pay the debt service for its own resources and second to purchase capacity in the RTO-managed market.
These revised MOPR provisions jeopardize traditional financing options for consumer-owned utilities and undercut their ability to protect their customers from supply and price volatility. This rule does not promote competition. Rather, it forces consumer-owned utilities to buy capacity from the market even if they can develop less expensive generation resources on their own. And this is simply absurd.
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