Electricity Markets

Electricity markets of the future: Making it work for public power

Is there a way to put consumers front and center in today's organized wholesale markets? That's a key aim for the American Public Power Association as it focuses on reforming market operations in the East and shaping emerging rules in the West.

"We think of it in terms of respecting the public power business model, so that our members have the ability to acquire the resources they need to serve their customers," said Joe Nipper, APPA's senior vice president, Regulatory Affairs and Communications.

Public power utilities often experience the discomfort of being square pegs forced into round holes, especially when organized markets become increasingly complex operations, as they have in the Eastern states. Understanding how this came to be requires a look into the past.

Nearly two decades ago, federal regulators first authorized the creation of grid operators, known as regional transmission organizations and independent system operators. Originally, these non government entities were meant to ensure that investor-owned utilities grant independent power producers open access to transmission wires.

The value of the original intention is clear, Nipper said. "Operation and planning of the transmission system is a positive." But the system's original intention barely remains.

With the restructuring of electricity markets, the divestiture of utility assets, and the onset of retail electric competition, the regional transmission organiza-tions and independent system operators extended their reach. In Eastern states, they no longer govern just transmission, but coordinate complex real-time energy and capacity transactions with the aim of ensuring reliable supply and minimizing costs.

The capacity market migraine
Energy markets usually involve no more than meets the eye — the sale and purchase of power through a central exchange — with the goals of creating market liquidity, dispatching power efficiently, and balancing power in wide geographic areas, which are all positives. But mandatory capacity markets, particularly for public power utilities, are another story.

A capacity market is a bit more abstract in purpose. It's a mechanism to pay power plants to ensure they are at-the-ready should the need for them arise in the future.

Getting capacity markets to work right has been an elusive process, said Mike Kirkwood, general manager of the Pascoag Utility District, a Rhode Island quasi-municipal utility within the ISO New England footprint.

"They keep tweaking the rules. We have not had one auction with the same set of rules since the forward capacity market started [in 2010]," Kirkwood said. "They call it a market. We don't see it as a market; we see it as an administrative construct that keeps evolving to try to solve problems."

The process has been so tedious that the mantra became "the market will provide, and that's not happening," said Brian Forshaw, chief regulatory and risk officer at the Connecticut Municipal Electric Energy Cooperative. He said that the original mandate to use markets to better serve consumers has somehow transformed into "protect the ‘competitive markets' no matter the impact on electric consumers."

In a recent brief, the cooperative said that, since 2012, Connecticut retail electric rates have been 62 percent higher than the national average and 67 percent higher than the Southeast region. CMEEC estimates at least 55—60 percent of these retail charges originate from the independent system operator markets.

In short, Kirkwood, Forshaw and others in public power worry that the voice of the consumer becomes lost in pursuit of "ideal" market structures that aren't necessarily so ideal.

Given these problems, APPA is looking for the way forward with concrete changes that public power utilities can promote to put the customer at the fore.

Focusing on what works
APPA sees some promise for reform in the East and a good start in the West as stakeholders work on expanding California's market. And it's important to focus on not just what needs to be fixed, but also what works, said Elise Caplan, APPA's manager of electric markets analysis.

For example, the PJM Interconnection offers a detailed annual market monitor report that helps foster a transparent market. In the Southwest Power Pool, board members make decisions by straw poll, so it's readily apparent how they think, creating a strong level of accountability, Caplan said.

Nonorganized markets also offer lessons to be followed when reforming wholesale markets. She pointed to the effectiveness of bilateral contracts and utility resource ownership in vertically integrated states where utilities still own generation.

In keeping with this idea, Kirkwood advocates for market rules in New England that allow public power utilities to once again self-supply.

Public power utilities in the region can already do this — at least in theory. Unlike investor-owned utilities, public power utilities did not participate in retail access and were not required to sell off their generation when retail competition began in New England and other states. They can still build generation plants and contract for power bilaterally — they can buy directly from a seller rather than through the wholesale market. But that's in theory. In practice, several rules make it near impossible, said both Kirkwood and Forshaw, who recommend revising these rules.

This loosening of restrictions on public power's self-supply could change New England markets, moving them away from today's concentrated centralization, Forshaw said. With more customers contracting directly for power, less need would exist for central procurement through ISO New England, he said. Instead, the ISO would become more of a residual market, a place for buyers to turn when bilateral contracts, or their own generators, fall short.

Public power advocates also argue for more consumer representation in government, particularly before the Federal Energy Regulatory Commission, which oversees wholesale power markets and the RTOs. Forshaw recommended that one seat on the commission be designated for a consumer representative. The seat could be filled, he said, by a former state public utility commissioner, or someone else who is accustomed to balancing the needs of consumers against the needs of investor-owned utilities.

Market expansion in the West
Out on the West Coast, public power advocates are looking at these and other market features as they craft wholesale markets to suit their regional needs.

Bill Gaines, director and CEO at Tacoma Public Utilities in Washington, has been working with APPA to help develop public power principles as the California ISO looks to create a larger regional market.

"One of the primary goals is to maintain the viability of the vertically integrated public power business model, where the utility retains ownership of the generation assets," Gaines said.

Another goal is to ensure fair governance. Gaines would like to see an independent board, free of politics, overseeing the expanded ISO.

It's also important to be sure that the board members have no financial interest in decisions they are making, added Michelle Bertolino, director of Roseville Electric, a community-owned utility in the Sacramento, California, metro area. The members should be "independent of thought," she said, suppressing their biases for the greater good of the market.

"I think we need to take our time in implementing this. We want to have a very robust stakeholder outreach process," she said.

Public power represents about 30 percent of the load in the West, so it's important that it have a strong presence at the table as the new market forms, said APPA's Caplan. "We want an open process with a lot of input for our members."

The bottom line for all of the markets, she said, is that they are best as voluntary, less centralized entities that accommodate community and state policy priorities, bilateral contracts, transparency and good governance.

Getting wholesale markets right is important, particularly now, as communities and states pursue clean energy goals and position to get ready for federal emissions reduction mandates under the Clean Power Plan. Success for these programs depends upon market flexibility and the freedom to make the most of local resources.

"The energy world is going through major changes. You want to be thoughtful and careful," Caplan said.