Monday, June 25, 2018

RTO Markets at Crossroads, Hobbled FERC Ponders Options

By Rich Heidorn Jr.

WASHINGTON — More than 50 stakeholders from PJM, NYISO and ISO-NE made their cases to FERC last week on how to resolve the increasing conflicts between state energy policies and wholesale markets.

Many of those who testified also had appeared at the commission’s September 2013 technical conference, which was billed by then-Commissioner Tony Clark as a “check-up” on the capacity markets six years after the inception of PJM’s Reliability Pricing Model. Participants at that time differed on the health of the markets and whether major changes were needed. (See Capacity Market Attracts Praise, Criticism at FERC and Old Issues, New Technologies in Capacity Debate.)

Last week, however, virtually everyone was calling for change — the disagreements being over how much, how fast, what kind and whether it should be directed by FERC or come from stakeholders.

The diagnosis: The patient is running a fever and will only get worse without treatment.

Fuller | © RTO Insider

“The challenge before the commission, the states and all other stakeholders is no less than the question of whether the power industry will continue to use competitive markets as the basis for investment decision-making,” Peter Fuller, vice president of market and regulatory affairs for NRG Energy, said in his written testimony.

“Is there a role for the markets? Absolutely,” said Scott Weiner, deputy for markets and innovation at the New York State Department of Public Service. “The energy markets will always be there. The capacity market may not be.”

FERC scheduled the conference out of concern that the RTO/ISO energy and capacity markets could lose relevance — or have their pricing signals undermined — because of state plans to procure out-of-market renewable power and prop up nuclear generators (AD17-11).

“There are three ways this could go,” acting FERC Chair Cheryl LaFleur said at the opening of the two-day conference May 1. “A designed market solution, a litigated outcome or a planned change in the regulatory construct of how we handle resource adequacy. The fourth outcome — an unplanned change in the regulatory construct — or unplanned and piecemeal regulation, is one that I think we should avoid because I think it would be a bad outcome for customers and market participants in terms of cost, reliability and regulatory certainty.”

wholesale markets ferc

Honorable (left) and LaFleur | © RTO Insider

“All options, in my mind, are on the table,” added Commissioner Colette Honorable.


The witnesses fell into several camps.

Public power representatives said they should be relieved of participation in the capacity markets, which they say are too expensive and inflexible. Unlike in 2013, they had lots of company in calling for change.

Independent power producers called for FERC to act decisively to protect markets from out-of-market contracts and subsidies.

The grid operators differed on their preferred role for FERC, with PJM and NYISO urging the commission to set deadlines and provide direction.

Officials from New England said they will continue to pursue their states’ clean energy mandates with or without cooperation from the wholesale markets.

Carbon Adder

Economists have been telling FERC and others for years that the simplest way to reconcile the markets with environmental policies is to incorporate the cost of carbon into LMPs and generation dispatch. While New York and PJM are exploring ways to do so, New England policymakers said differences in state policy goals make it politically unpalatable despite its economic elegance.

Instead, ISO-NE has proposed a two-tiered capacity auction intended to incorporate state-mandated renewable generation while preventing oversupply.(See related articles, ISO-NE Two-Tier Auction Proposal Gets FERC Airing, PJM Stakeholders Offer Different Takes on Markets’ Viability and NYISO See Carbon Adder as Way to Link ZECs to Markets.)

IPPS: FERC Should Act Decisively Against Subsidies

Independent power producers NRG, Calpine, Dynegy and Eastern Generation, and their trade group, the Electric Power Supply Association, called for FERC to act quickly and firmly.

Shelk | © RTO Insider

“A policy approach that lets any given action prevail at all costs in the name of a ‘state preference’ regardless of the detrimental impact on federally regulated wholesale markets would be the exception that swallows the rule of law in the” Federal Power Act, EPSA CEO John Shelk said. “If the commission wishes to continue delivering the benefits of wholesale markets, it needs to direct steps be taken by the Eastern ISOs/RTOs by specific deadlines to ensure that wholesale markets are protected and not undermined.”

FERC’s “hands-off approach” to date “rightly allowed states to experiment on the edges of the wholesale market with a variety of new programs and to avoid over-burdening these fledgling initiatives with federal intervention,” said Abe Silverman, vice president and deputy general counsel at NRG.

ferc wholesale markets

Hill | © RTO Insider

Now, however, the commission must develop “rule-of-reason” tests “to delineate how state programs are harmonized with competitive markets,” he said. “Wherever the line is eventually drawn, there clearly must be a line if the Federal Power Act is to have meaning.”

Calpine CEO Thad Hill also called for swift action.

“The legal process is lengthy, and it will take the courts considerable time to work through these issues. The commission should not wait for the courts to act, but instead the commission should be prepared to act quickly and decisively when viable proposals are brought before it,” he said.

Renewable Developers Also Favor FERC Action

Kaplan | © RTO Insider

Joining the IPPs in calling for action was Seth Kaplan, EDP Renewables’ senior manager for regional government affairs, who cited the D.C. Circuit Court of Appeals’ April ruling in Emera Maine v. FERC. That ruling upheld FERC’s Order 1000 finding that FERC-regulated transmission planning must accommodate state public-policy requirements. (See Court Rebuffs New England TOs, Upholds FERC ROFR Order.)

“The Emera decision reaffirms once again that FERC and the entities it regulates have the ability — and I would argue obligation — to recognize state policies, like renewable portfolio standards and procurements, as cost drivers that must be recognized in the transmission planning and cost-allocation process,” Kaplan said.

Aleksandar Mitreski, senior director of regulatory affairs for Brookfield Renewable, agreed, saying “the time is ripe for public-policy objectives to be incorporated into the wholesale markets.”

Shanker | © RTO Insider

Independent consultant Roy Shanker said FERC must take a leadership role because stakeholder negotiations will not prevent litigation. “The fundamental differences among parties … make any cooperative solutions unlikely,” he said. “In the presence of such fundamental differences, any path forward requires the commission to exercise its full authority over wholesale markets in order to find a resolution that does not cannibalize markets.”

New England: Butt Out, FERC

State officials from New England were equally forceful in saying they don’t want FERC interfering with ongoing stakeholder processes.

“Our work with the National Council [on Electricity Policy] supports the idea that states are well suited to collaboratively working out answers to the policy questions addressed by this technical conference,” said Vermont Public Service Board Commissioner Sarah Hofmann, a member of the NCEP’s executive committee.

Chairman Angela O’Connor, Massachusetts Department of Public Utilities (left) and Scott | © RTO Insider

“The New England states have shown the ability to work collaboratively to address climate change through [the Regional Greenhouse Gas Initiative], which is a program under state control,” New Hampshire Public Utilities Commissioner Robert Scott said. “Addressing carbon emissions through a federally controlled tariff based on state policies raises significant concerns not only about the potential for unreasonable allocation of costs but also states’ rights. If the federal government wishes to regulate carbon emissions in the wholesale electric sector, Congress should pass a law giving the appropriate agency such authority.”

The Beginning of the End of RPM?

Public power representatives reiterated their longstanding complaints about mandatory capacity markets, saying they could provide resource adequacy more cheaply through bilateral contracting and self-supply.

McAlister | © RTO Insider

Lisa McAlister, general counsel for regulatory affairs at American Municipal Power, said FERC should eliminate the mandatory participation requirement in PJM’s capacity market. “RPM is a ‘market’ in name only, and, as time has gone on, fewer and fewer PJM market participants use that term to describe it,” she said.

“With respect to meeting adequacy needs, the markets have been a success,” said Cliff Hamal, managing director at Navigant Economics, who has consulted for AMP in PJM’s new capacity initiative. (See PJM Capacity Task Force Debates the Value of Price Transparency.) “With respect to doing so at a reasonable cost to consumers and consistent with meeting other legitimate policy goals, I think we can do better.”

Hamal said the capacity market’s cost of capital is increased by a “volatile, fickle and frail price mechanism that relies more on regulatory nurturing than the fundamentals of supply and demand.”

While RTOs should continue to set capacity obligations for load-serving entities, Hamal said, the LSEs should be allowed to meet their obligations independently.

ferc wholesale markets

Hamel | © RTO Insider

“I believe the most promising option would be to allow state policies to be implemented through a formal commitment to bilateral markets. States would withdraw from the RTO centralized auctions and meet their capacity objectives bilaterally,” he said. “Energy markets will continue to function and capacity markets will return to providing the ‘missing money’ in the sense of a supplemental payment needed to ensure supply adequacy after consideration of all other revenue streams.”

Deadlines for Stakeholder Processes

Silverman said the commission should “direct each of its ISO/RTO markets to set forth a comprehensive plan to integrate state goals into its wholesale market outcomes in a sustainable manner. Unless the commission mandates such a process — by a date certain — I fear that states will continue to pursue carbon mandates outside of the organized markets, and society will be deprived of the benefits of competitive markets.”

PJM and NYISO officials said they would welcome FERC deadlines to pressure stakeholders to compromise on rules for incorporating state initiatives into the markets.

“We don’t want to run a 50% market. … We want to be the market that all resources depend on … for entry decisions, and we will work with the state to achieve those goals,” said Rana Mukerji, senior vice president of market structure for NYISO. “The stakeholder process … is long and contentious. Having deadlines works miracles.”

“Yes, there are compromises that come out [of the stakeholder process]. Yes, they can lead to maybe suboptimal … approaches,” said PJM Senior Vice President for Operations and Markets Stu Bresler. “But I can say without reservation [that] almost universally what comes out of a detailed stakeholder vetting of an issue is better than what went into it.

He added: “Deadlines and guidance from the commission are always helpful with respect to the efficiency of how that stakeholder process works.”

White | © RTO Insider

ISO-NE and the New England Power Pool, however, urged FERC to give them breathing room. Matt White, chief economist for ISO-NE, said the RTO will file a proposal with FERC by late this year or early 2018.

“The house is not burning down so fast that we must make an exigent circumstances filing with you within a week,” he said. “Coming up with something we can do and you will not be tweaking it again and again and again and again is probably worth six to nine months of our time.

“We have a very active stakeholder process that is deeply engaged on these issues,” he continued. “A deadline would not be terribly helpful.”

Not everyone saw the value of stakeholders’ participation, however.

FERC wholesale markets

Hughes | © RTO Insider

“FERC should immediately begin a formal inquiry to rationalize the capacity and energy market constructs with the long-term financial needs of different operational categories of electric generation,” said John P. Hughes, CEO of the Electricity Consumers Resource Council, which represents large U.S. manufacturers. “We strongly oppose any attempt to solve this problem via negotiated settlements in ISO or RTO stakeholder processes.”

Now What?

The “crossroads” for the markets, as multiple speakers called it, comes at a time when FERC has never been less prepared to act. With three empty seats, it has been without a quorum since February; Honorable announced last month that she won’t seek a new term when hers expires in June.

So, as the participants wheeled their suitcases to cabs outside FERC headquarters at the end of the two-day hearing, the commission’s policy direction could hardly be more uncertain.

ferc wholesale markets

With President Trump — who has moved to dismantle his predecessor’s climate change policies — in a position to fill four of the five seats, at least some of the new members could be hostile to Northeast states’ climate policies. At press time, there were numerous reports that Trump will nominate Pennsylvania regulator Robert Powelson and Neil Chatterjee, senior energy policy adviser to Senate Majority Leader Mitch McConnell (R-Ky.) to fill two Republican vacancies on FERC. Chatterjee was described in a Bloomberg profile as “the McConnell adviser determined to stop the Clean Power Plan.” (See related story, Trump Nominates Republicans Powelson, Chatterjee to FERC.)

Even if the commission did support an RTO-administered carbon adder, would it have the authority to do so?

Certainly someone will ask the courts that question.

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