Commission Watch
SMD White Paper: FERC Caves to Political Pressures
June 1, 2003
By Lori A. Burkhart
The commission tacks a new name onto a familiar concept.
By now it is old news that the Federal Energy Regulatory Commission (FERC) on April 28 back-pedaled on standard market design (SMD), even renaming it the "wholesale power market platform." But SMD is far from dead, as some had wished. Instead, it is merely toned down, bowing to political furor and regional differences.
Listen to Edward Krapels, director of gas and power services at Energy Security Analysis Inc. "It's easy to be an immediate critic of FERC, but I think at the highest level they had to do what they did. I don't think they had much choice." Indeed, FERC gave in to political pressure, "because the political community just was saying no to SMD, and that was just a fact they had to contend with"-not only from state commissions and the Senate, but even within the administration. "I don't think there was a lot of interest in turning the SMD into something that alienates the president from some of his constituents" Krapels believes. "I just don't think people believed in it enough to make it something they wanted to fight for."
In agreement is Mary Anne Sullivan, partner in the energy group of Hogan & Hartson, and former general counsel of the Department of Energy from 1998 to 2001. "I think they recognized that they had made a mistake, they had pushed too hard, and if they continued to push in the direction of SMD their authority was going to be cut off by the Congress," she says.
Sullivan believes FERC Chairman Pat Wood recognized from the beginning that the industry was evolving toward a market-based approach, but that approach was largely the product of voluntary action taken under Order 888 and Order 2000. "What FERC erred in doing was trying to force that evolution when they didn't have the key stakeholders, most notably the state commissions, on board, and when the trauma of the California crises was so fresh on everybody's mind," Sullivan says.
Kiesling's Questions
Lynne Kiesling, senior lecturer in economics at Northwestern and director of economic policy at the Reason Foundation, had raised questions about the proposed SMD in a November 2002 report, SMD in Wholesale Electricity Markets: Can FERC's Proposed Structure Adapt to the Unknown? Kiesling characterizes FERC's white paper as a "mixed bag" and says the recognition of the importance of regional variation is good. "In talking to folks of various affiliations, I always have had the impression that there is a widespread belief that regional variation is needed, but where do you draw the line?" she asks.
The white paper has moved in a good direction, Kiesling says, because the one-size-fits-all approach is not going to work, given how heterogeneous and diverse our economy and geography are.
Sullivan does give FERC credit for holding a series of regional conferences prior to issuing the SMD. "They knew the opposition was out there, and I guess they just did not gauge its depth. I also think they suffered a little bit from the theoretician's fervor for perfect markets, and they did not give enough weight to the strength of the feeling about other values like protecting native load, and respecting state authority," she adds.
Indeed, the pressure from Southern and Northwestern states proved to be too great. "We interpret it more as a state's right issue than anything else," Krapels said. He predicted a divide between the areas that are committed to it and the areas that are not. "So the areas that are committed to it, what the white paper said to me is, 'Do what you need to do, what you think is right. We are not going to try and make it one size fits all,'" he says.
He noted that even between New York and PJM there are some important differences in design. "So let a thousand flowers bloom," Krapels says. "But I am convinced that the PJM model, the New England model, the New York model, are all practical and they are going to work. They are working as we speak-not perfectly, but those reasons are not going to go back."
As for the future, Krapels thinks the regions that don't like it eventually will be attracted to it. "I don't see us going back to pre-SMD or pre-PJM style markets," he says. Virtues of LMP
FERC's Appendix A to the white paper compares the newly proposed wholesale market platform with the RTO requirements of Order 2000. FERC backs down from making LMP a requirement, and while its preferred approach to congestion management is through locational marginal pricing (LMP), it says other methods may be proposed.
Kiesling is glad LMP will not be mandatory. She believes mandates introduce too much rigidity and hamper development of robust, flexible markets. "I wish they would have backed off more," she adds.
Krapels disagrees. "While having locational prices everywhere is a good idea, I think FERC still said that we'd like to see it happen," Krapels noted. "How you implement the regime within which those prices emerge is something we will let people deal with on a regional basis."
Sullivan says that ultimately, based on the kind of success stories that occurred in PJM, New England ISO, and New York ISO, other states and regions may begin to appreciate the value of dealing with congestion in the way SMD suggested. "But they are not ready now," she cautions, "and I think the religious fervor of the opponents has been awakened. I do not think it is going to be extinguished any time soon."
Krapels says FERC is not abandoning the idea of LMP, but the timetable for imposing it. "To think that PJM, for example, would go back to something that pre-dates their system underestimates how satisfied people are with it," Krapels said. "It is a great system."
Legislative Delay
The Senate energy bill includes amendments delaying SMD implementation in any form until as late as 2005 or 2007. But Krapels believes this may go away. "Now that they have issued the white paper, maybe they have disarmed that movement and maybe they won't spend any political capital to enforce that," he said. "But even if they do I think the white paper effectively says, 'OK, that is fine.'"
Sullivan expects FERC to back down even more from the white paper. "Even if the Senate bill, which precludes [FERC] from moving to a final rule, does not get enacted, it is hard for me to imagine [FERC] will be able to go to a final rule that isn't even more watered down than what the white paper reflects," she says. "Having awakened the sleeping giants, it is going to be awhile before they go back to sleep."
Sullivan finds it interesting that FERC and the Senate both have recognized the appropriateness of allowing the RTOs and the ISOs that are up and running, or about to be up and running, to move forward on an voluntary basis, "even where their proposals depart from the theoretician's perfection."
"I think everybody is willing to let those that have reached voluntary agreement go forward, and my guess is that will be the trend over the next handful of years."
Kiesling thinks it is pretty clear that FERC offered the white paper as a way to better inform the Senate where FERC stands, and to protect against any delays in funding due to uncertainty about a final rule. She adds, succinctly, "The Senate bill is just a mess."
Lori Burkhart is a legal editor of Public Utilities Fortnightly.
In Brief . . .
- Gas Price Reporting. FERC directed 11 companies to show they have corrected procedures for reporting natural gas price data to help ensure that companies publishing price indexes receive complete and accurate information. Commissioner Brownell concurred separately. Dkt. Nos. PA03-1-000 et al., April 30, 2003, 103 FERC 61,089.
- CAISO Grid Charges. FERC largely upheld an initial decision on the California ISO's unbundled grid management charge (GMC) for 2001, but reversed on two issues: (1) allocation of control area service (CAS) costs to behind-the-meter generation; and (2) passthrough by Pacific Gas and Electric Co. of the market operations component of the GMC. FERC reallocated ISO costs among customers to prevent the trapping downstream of such costs. Dkt. Nos. ER01-313-000 et al., May 2, 2003, 103 FERC 61,114.
- MISO/GridAmerica Tariffs. FERC accepted tariff revisions to Midwest ISO's open access transmission tariff to allow for service over transmission facilities of GridAmerica LLC, which allows that independent transmission company to begin service within the MISO footprint. Dkt. Nos. ER03-580-000 and EL03-119-000, April 30, 2003, 103 FERC 61,090.
- Enron Co-gen Investigation. FERC initiated an investigation into Enron Corp. and its ownership of three cogeneration facilities, concerning whether Enron improperly retained qualifying facility benefits from the facilities after its merger with Portland General Electric. Dkt. Nos. EL03-117-000 et al., May 2, 2003, 103 FERC 61,122.
Articles found on this page are available to Internet subscribers only. For more information about obtaining a username and password, please call our Customer Service Department at 1-800-368-5001.
Public
Utilities Fortnightly & Spark
