Public Power - May 2008 - (Page 10)

PERSPECTIVE Time for Real Change in Restructured Markets By Mark Crisson • President & CEO • American Public Power Association In 2006,creation of board of directors authe APPA thorized the Electric Market Reform Initiative (EMRI), a concerted attempt to assess and address the problems our members are experiencing in the restructured wholesale power markets in regional transmission organizations. These problems included rapidly increasing wholesale power prices, spiraling RTO administrative costs, the failure of market signals to ensure generation resource and transmission adequacy, and the increasing difficulty in obtaining long-term bilateral power supply agreements at stable and reasonable prices. When APPA asked members to contribute money to the EMRI effort, there was very positive response from members both inside and outside RTO regions. In February 2007, APPA presented the results of its EMRI Phase 1 studies at an all-day conference in Washington. The studies demonstrated that the markets provide no incentive for construction of new infrastructure, have not eliminated market power, have very high administrative costs, often have bids submitted above actual marginal costs, and have transferred billions of dollars from electric consumers to power providers. Moreover, an EMRI review of the most commonly cited studies of restructuring, a number of which were funded by power producers, revealed the studies were all significantly flawed and that there is no evidence that consumers are better off. The EMRI studies also demonstrate that when RTOs make changes to address market deficiencies, things only get worse. A case in point is the capacity markets implemented in PJM and the New York ISO to 10 MAY 2008 incent development of new generation capacity. These incentive programs have raised prices significantly, but new capacity has not materialized. Making incremental changes by applying one bandage after another in an attempt to address market shortcomings has been expensive and fruitless. It is another indication that there are fundamental, systemic problems with the restructured power markets. Shortly following the release of the EMRI study results, the Federal Energy Regulatory Commission announced an advanced notice of proposed rulemaking (ANOPR) to examine restructured markets. Unfortunately, the scope of the ANOPR was very narrow, limited to only four issue areas, which might yield incremental improvements but would not address the more fundamental, systemic problems. Moreover, the language in the ANOPR itself clearly indicated that the commission believes the markets are working and simply need only fine tuning. Nonetheless, in our response to FERC’s request for comments, APPA went beyond the four issues and provided a strong argument in support of a comprehensive investigation of the markets by the commission under its Federal Power Act Section 206 authority. We were not alone in calling for the commission to take additional steps. Forty other parties supported a formal pleading to FERC to conduct a comprehensive investigation. APPA and the other parties did not make this request lightly. We recognize this would require considerable time and resources, given that not all markets have the same problems, and some markets function better than others. But much is at stake, and FERC is the only entity with the authority, resources, and access to the data necessary to perform a comprehensive and credible study. Such a study could then provide the basis for FERC to lead a collaborative stakeholder process to develop workable, sustainable solutions that balance the needs of both power consumers and suppliers. Unfortunately, at its February meeting, the commission issued the NOPR with no significant change in scope. While APPA commented on the four discrete issues identified in the ANOPR, we did not propose fundamental solutions to the market problems, because we believe FERC should take the lead. And while APPA supports market improvements, we do not think incremental refinements are sufficient to address more basic market shortcomings. We have concluded that it is now time to suggest a very different approach to restructured markets. Consequently, APPA is recommending that RTOs phase out Day 2 markets and focus on the operation of Day 1 markets, as described in our new white paper, Consumers in Peril. In a nutshell, Day 1 markets provide the benefits that APPA members envisioned when they publicly supported the formation of RTOs several years ago: enhanced transmission access, regional transmission planning and development, an energy imbalance market, elimination of rate pancaking, and improved resource dispatch. The current markets do a good job providing many of these benefits. The major problems are with the Day 2 markets. Phasing out Day 2 markets will benefit consumers by promoting long-term bilateral contracts, reducing RTO administrative costs, reducing market complexity, and potentially enhancing resource development. We recognize that a successful transition to Day 1 markets will require that a number of issues be addressed. Given the differences in each RTO region, a change will likely require different approaches tailored to each RTO. We are preparing a more detailed version of this proposal in a separate document, which will be published later this year. It’s time for real change in restructured markets. ❚ PUBLIC POWER

Table of Contents Feed for the Digital Edition of Public Power - May 2008

Public Power - May 2008 Contents Perspective LEEDing the Way Ontario Moves to Mandatory Time-of-Use Pricing Journey to the Smart Grid Right-Sizing Transformers Energy Audits for Large Industries Economic Development Community Broadband Reliability Hometown Connections Parting Shot

Public Power - May 2008

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