Benefit of Counsel: Rethinking the near-term platform for achieving competitive wholesale markets

Issue 5 and Volume 81.

Larry Eisenstat and Patricia Alexander, Dickstein Shapiro Morin & Oshinsky

Last spring, a comprehensive plan was coming together to support the merchant generation fleet that will become the centerpiece of competitive wholesale markets. FERC was completing an extensive dialogue on standard market design, and was drafting a proposed rule for implementation over the coming year. Also, through its proposed rule on generator interconnections and its new network resource interconnection service, FERC sought to marry the historical concept of a network resource constructed to serve a specific customer with the reality of merchant generators that, while expecting to serve many customers, cannot know which customers they ultimately will serve, nor their location, over the plant’s life. And, FERC was keenly focused on completing necessary technical work for RTO (regional transmission organization) development.

Today’s reality is strikingly different. FERC’s initiatives are paralyzed by controversy, and its vision for a comprehensive restructuring no longer appears achievable in the near-term. Yet, hundreds of thousands of MW of efficient, environment-friendly, merchant generation has gone, or soon will go, commercial. What can be done, given that neither the status quo nor FERC’s now delayed comprehensive approach can support competitive generation? Simply put, the industry and its regulators, both state and federal, must rethink the near-term platform for achieving competitive wholesale markets, and agree to adopt discrete, feasible transitional initiatives that preserve the best of the contemplated restructuring while allowing its more controversial aspects to be put on hold until a broader regulatory and political consensus is forged.

For starters, it is critical that there be some mechanism to integrate merchant generation into short term energy markets in regions where there are no central spot markets. Currently, load-serving entities (LSEs) rely on economic dispatch to integrate their generation resources in the short term—i.e., they operate their integrated transmission and power supply system, in real-time, in a manner that schedules and economically prioritizes all available generation so as to minimize the cost of electric energy used to serve consumers. However, while many regions are now populated by low cost, efficient merchant generators, for the most part these merchants are not allowed to routinely offer their output for inclusion in the local LSE’s economic dispatch and to have that offer accepted (provided it is lower than the LSE’s own costs). This is true even though the technical and commercial practices necessary to incorporate merchant generation into economic dispatch are neither infeasible, nor extraordinarily complex, and even though the benefits to customers of increased access to lower cost energy are so obvious.

Ratepayers surely would benefit from LSEs establishing a formalized process to solicit energy from merchant generators to meet daily load requirements. Consistent with economic dispatch today, the LSE would not accept a purchase unless it offered a lower cost than the LSE would incur to self-generate or by scheduling energy under existing bilateral agreements. As is also the case today, inclusion of merchant generation into economic dispatch would have to accommodate generation and transmission facility operating limits (e.g., minimum run times and voltage constraints). Finally, technical protocols could readily establish the process for placing and accepting offers, operational requirements, nonperformance penalties, etc., and standard contract forms could support these routine transactions.

In the near-term, ratepayers also would benefit from implementing better models for the competitive procurement of longer-term resources. A structured and transparent process that identifies the best available resource options, taking into account price and nonprice terms, should be a no-brainer for consumers. Other candidates for easily implementable near-term improvements include: integration of merchant generation into regional generation and transmission planning models, adding a network resource interconnection service to the FERC transmission tariff, establishing transmission hubs in regions where they can best support natural markets, and establishing independent market monitors to evaluate grid and market operations in all regions.

Importantly, these initiatives are not the exclusive province of federal regulators, and many—like expanded economic dispatch and competitive procurement—can be implemented entirely by state regulators. Thus, any individual state can take the lead in implementing this approach, and only if it were not to do so, would the FERC act under its federal authority. If near-term improvements can increase the opportunity for efficient, environment-friendly merchant generators to provide electricity at competitive prices, everybody should be better off, but certainly consumers.

Eisenstat is a partner in the Energy and Natural Resources Practice of Dickstein Shapiro Morin & Oshinsky LLP and head of the firm’s Electric Power Practice. He may be reached at 202-828-2224 or [email protected] Alexander is an energy consultant with the firm, and she may be reached at 202-756-2918 or [email protected]