FERC Urged Not to Go Overboard on Wholesale Electricity Capacity Markets – New York Needs Independent State Consumer Advocate
Consumer and other groups filed a request with FERC last month, asking the agency not to expand the role of wholesale spot markets for electricity capacity. For reliability purposes, retail utilities individually and collectively must have the ability to meet their customers’ demand for electricity on the day of predicted highest usage, plus a reserve margin. In states where electric utilities make electricity for customers, this capacity requirement is met by owning operable generators plus economic purchases to supplement the self-supplied capacity. Traditionally the purchased capacity would be obtained through negotiated long term contracts filed with FERC under the filing requirements of the Federal Power Act. Long term contracts often are for ten years or more, and with such contracts in hand, merchant power plants may obtain credit to build new power plants costing hundreds of millions of dollars, which might run for decades after construction.
Capacity obligations became more complicated in 15 jurisdictions, including the District of Columbia, where policy makers required, or, in the case of New York, induced, the divestiture of all or nearly all power generation plants by the retail distribution utilities. Having no or few power plants of their own, these utilities became far more dependent upon acquiring the required capacity in the FERC regulated wholesale markets. The old power pools from PJM, New York, and New England morphed into RTO and ISO organizations. In addition to orchestrating the generation and flow of power on the bulk power grid, the RTO/ISOs created new uniform clearing price auction spot markets for electricity and capacity. The energy market auctions are day-ahead and real time, and all energy providers secret bids are arranged in ascending order and called to run until the need is met and are paid the same price, which is the price demanded by the last bidder called to run. The capacity markets range in durations from seasonal to a maximum of three years. As a consequence, the capacity auctions are unlikely to serve the role of long term contracts in getting power plants built. Both the energy and capacity market systems amount to an end run around the longstanding requirement of the Federal Power Act that no contracts be implemented and no rates be changed without 60 days advance public filing of the changes with FERC subject to objection and agency review for reasonableness. The spot market system privatizes the rate filing and price-setting function at the private RTO/ISO utilities which rely on sellers and traders to set the prices in secret. FERC screens sellers to see whether standing alone they have enough market share to exert market power, and approves the RTO/ISO tariffs, which set the market procedures, but not the actual prices. FERC assumes that if no single seller has market power the prices set in the market will meet the “just and reasonable” requirement of the law. The Supreme Court noted this change and in a case where the issue was not raised, pointedly indicated that it has not determined whether FERC’s “metaphysical” reliance upon markets to set rates and charges is legal.
There is a heightening fundamental tension over the role of the ISO/RTO markets: should all energy and capacity and related services be sold through those markets, or at prices set in those markets, mediated only by financial hedging with derivatives in secondary markets, or should the role of the energy markets be to supplement traditional negotiated and filed long term contracts?
The tension reached new heights when the states of New Jersey and Maryland tired of seeing their consumers paying hundreds of millions of dollars in capacity charges, ostensibly due to regional shortages. The money did not go to alleviate the perceived shortages through construction of new power plants, new or expanded transmission lines, or demand reduction. Rather the money goes to the bidders in the capacity auctions – the incumbent owners of existing power plants. FERC approves this in the hope that the high prices will induce a market response – new entry by others to build more transmission lines or power plants. That did not happen. Those states sought to get generation built by arranging long-term financial contracts with developers to assure them a dependable stream of income for a decade so that they could obtain credit to build plants with some assurance that the debt could be repaid and a return made on invested capital. The efforts foundered when lawsuits were brought by energy traders claiming the long term contracts interfered with the RTO capacity market prices and that FERC had occupied the field of wholesale capacity market pricing with its approval of the RTO markets. Federal district court rulings held that the financial contracts in New Jersey and Maryland were preempted by federal law, and those cases are on appeal. Interestingly, the contracts at issue were not the traditional negotiated purchase and sale contracts for long term capacity, but were financial derivatives – contracts for differences – based on the outcome of the capacity market auctions, which guaranteed payments to the developers which were indexed to the auction outcomes.
In New York, a more traditional effort was made to alleviate high capacity prices in New York City. Con Edison issued an RFP for ten years of capacity, and this enabled a new power plant to be build in New York City. The Utility Project supported that and also urged that energy be purchased by long term contract too, though the latter recommendation was not adopted by the NY PSC which apparently prefers channeling all energy purchases through the spot market. As a consequence, the plant was built, reliability was maintained, but customers were exposed to energy spot market spikes which frequently occur in the downstate area. Tension with the NYISO capacity market occurred later, when complex NYISO capacity market rules required Con Edison, notwithstanding its firm contract to buy capacity at the contract price, also had to pay NYISO capacity auction market prices for the same capacity. FERC ruled that Con Edison – and ultimately its customers – must pay the higher market prices, and thus its customers will not see the intended benefit from the long term capacity contract. FERC denied rehearing and the matter is now on review in federal court. Generally, rates set in filed contracts cannot be altered, but rates in unfiled contracts can be modified by FERC. It is not clear whether whether the re-pricing of capacity that occurs under the RTO/ISO auctions, even when prices were set by a filed contract, would be consistent with the filed rate doctrine.
Consumer groups including AARP, NASUCA, Consumer Federation of America, TURN, and New York’s Utility Project, APPA, publicly owned electric utilities, cooperatives, some state regulators, and others who seek to ensure the ability to acquire capacity through self-supply or contract, instead of through the essentially deregulated and flawed privatized ISO/RTO spot markets, have filed a letter pleading with FERC not to destroy the ability of states and utilities to meet their capacity needs wholly or in part through traditional self supply or at prices fixed by negotiated contracts.
In another capacity market development, NYISO created a new capacity zone in the lower Hudson region which will have the effect of raising bills for customers in the region beginning in May 2014 by another 10% for residential to 18% for large industrial customers, according to an estimate of Central Hudson. FERC has approved this and rehearing is pending. The NY PSC opposes the change, and in the alternative, has called for a gradual phase-in of the new capacity market zone and its effects.
The impact of excessive wholesale prices is directly passed through to retail consumer prices. No independent advocate for New York consumers is actively participating as a party in these important proceedings at FERC, or in the judicial review proceedings, which often follow significant FERC orders and play an important role in rate matters. An independent advocate could, for example, participate in NYISO decision-making structures (where the vote of residential consumers is marginalized), in FERC proceedings to review whether NYISO tariffs are just and reasonable, and in the judicial review proceedings. State advocates from other states frequently do this. In 2012, FERC approved using $10 million of a disgorgement by an alleged NYISO market manipulator for advocacy for New York residential consumers on wholesale electricity matters. The fund is held by NYSERDA to be distributed at $1 million/year for ten years. In March of 2013, the legislature appropriated $1 for advocacy on wholesale electricity issues to the Department of State Utility Intervention Unit, but to date nothing has been done to implement the program, and the money would be reappropriated in the Executive Budget for FY 2014-15.
A bill pending in the state legislature would address the programmatic and structural deficiencies of the existing state agency advocate, the UIU, which is the legacy CPB utility unit that was reorganized into the Department of State in 2011. The bill would completely reform the scope of the UIU activities on behalf of New York’s utility consumers, by making it a separate entity capable of participation in any forum where utility issues are decided, and makes its structure more independent.Under the existing UIU statute, there is no express authority for the UIU to represent consumers in FERC or FCC proceedings, even though the federal agencies’ role in setting rules and prices have more effect than ever on consumers. Also there is no express authority for UIU to challenge utility or regulators’ actions in court, and there is no independence in the structure of the office, for example, to challenge settlement agreements when other arms of the state agree to settle matters, which is a principal mode of decision making by regulatory agencies.
In addition to statutory overhaul of the UIU and implementation of the wholesale electricity advocacy fund with the FERC funds, we believe there is a need for continuation and expansion of funding for the Utility Project, to advocate on behalf of low-income utility and energy consumers, and for eventual enactment of a utility intervenor funding program to support more adequate representation of consumers in lengthy and complex utility regulatory proceedings.
Gerald Norlander