July 31, 2002 — Asserting that the absence of a single set of rules for the wholesale electric industry is preventing markets from realizing their full potential, the Federal Energy Regulatory Commission (FERC) on Wednesday announced wide-ranging proposals to remedy undue discrimination in the use of the interstate transmission system and give the nation the benefits of a truly competitive bulk power system.

In a landmark Notice of Proposing Rulemaking (NOPR), FERC proposed a series of sweeping changes to bring to fruition the kinds of markets envisioned-and advanced–in key Commission orders Nos. 888 and 2000 but not yet realized.

Comments are due within 75 days of July 31. Several documents are available on FERC’s web site at https://ferc.gov/Electric/RTO/Mrkt-Strct-comments/discussion_paper.htm#NOPR.

The blueprint for change is designed to create genuine wholesale competition, efficient transmission systems, the right pricing signals for investment in transmission, generation facilities and demand reduction, and more customer options.

Market monitoring and market power mitigation proposals are also critical parts of Wednesday’s proposals for standardized power market rules.

Chairman Pat Wood, III commented: “Our goal is to promote economic efficiency in electricity for the benefit of all Americans. Standard market design and standard transmission service lets sellers transact easily across geographic boundaries, cuts costs to customers and improves reliability. We want solid infrastructure, just and reasonable rates, and balanced market rules so investors and competitors see some stability and opportunity in all aspects of the bulk power business. These clear rules and vigilant oversight under a uniform system will replace the obsolete patchwork that we have recently.”

Problems with the existing markets
The commission said it undertook standard market design (SMD) because of persistent and costly problems in the nation’s wholesale electric power markets. These include a decade of under-investment in needed transmission, generation siting in locations far from customers, unduly discriminatory behavior by transmission providers against independent generators, and fundamental design flaws in certain existing electricity markets.

These problems have reduced efficiency of grid operations, occasionally compromised the reliability of the grid and raised costs for all customers. Sound market rules and fair and open transmission access, as implemented under these rules, should cure many of these problems.

To provide a level playing field, enhance competition, remove economic inefficiencies and ensure just and reasonable rates, the commission proposed to modify its pro forma transmission tariff to include, among other things, a single flexible transmission service-Network Access Service.

This service would apply consistent transmission rules for all customers-wholesale, unbundled retail and bundled retail-as well as a standard market design for wholesale markets. The current pro forma tariff allows different types of customers to be treated differently, in part because conflicting state and federal rules govern the use of interstate transmission facilities.

The commission proposed to work closely with the states on all transmission services to customers, over which it proposed to exercise jurisdiction, to achieve non-discriminatory transmission services over the entire interstate grid. Central to the standard market design concept is its reliance on bilateral contracts entered into between buyers and sellers.

The proposal would require transmission service providers to be independent of market participants and to establish short-term electricity markets to complement bilateral contracts.

To handle generation imbalances and the procurement of ancillary services, the commission proposed to require that independent transmission providers operate voluntary short-term markets for energy and operating reserves in conjunction with markets for transmission service.

These markets would be bid-based, security-constrained, spot markets operated in two time frames, day-ahead and real time. The adoption of a market-based locational marginal pricing (LMP) transmission congestion management system is designed to provide a mechanism for allocating transmission capacity to those who value it most.

The system would encourage efficient provision of transmission service and encourage the development of needed transmission, generation and demand response infrastructure. LMP reveals the value of power at each location on a grid and reduces transmission system congestion between locations.

This in turn reveals the value of locating generation at different points and upgrading transmission. It also suggests the value of reducing electricity consumption. To guard against over-reliance on spot markets, FERC is proposing a resource adequacy requirement to ensure that future regional needs are addressed through self-supply or bilateral contracting.

To further encourage transmission investments, the commission proposed to require industry stakeholders to participate in a regional process administered by an independent transmission provider to identify the most efficient and effective means to maintain reliability and eliminate critical transmission constraints.

Efficient market design can eliminate opportunities for market manipulation and market power, and FERC proposed measures to protect customers against the exercise of market power when conditions do not support a competitive market.

Market monitoring at all times, and market power mitigation when needed, are critical aspects of the initiative. The proposed mitigation would rely on a combination of methods to protect against market power by preventing sellers from withholding economical supplies but permitting prices to reflect true scarcity. The mitigation would be more flexible where the market is sufficiently competitive.

At the same time, because market power mitigation may suppress scarcity prices, a companion mechanism besides spot prices is needed. The proposed resource adequacy requirement would ensure adequate generating, transmission and demand response infrastructure that is determined on a regional basis.

The commission proposed a resource adequacy requirement that will complement state programs. In particular, the commission proposed that a each independent transmission provider must forecast its future needs, facilitate regional determination of an adequate level of resources and assess the adequacy of the plans of utilities to meet regional needs.

Each load-serving entity would be required to meet its share of the future regional needs through a mix of generation and demand reduction. If the load-serving entity fails to submit a satisfactory plan for adequate future resources, the independent transmission provider will inform the appropriate state regulatory authority that the customers of that load-serving entity may be denied spot market energy in the event of a shortage.

The NOPR requirements would be mandatory for all public utilities that own, operate or control transmission facilities in interstate commerce. The commission expects that the requirements of the NOPR will be met through regional transmission organizations (RTOs), but if a public utility chooses not to join an RTO, it will have to contract with an independent entity to perform certain requirements. Regional flexibility in certain areas would be allowed.

This will ensure the continuation of a strong role by state regulatory authorities in helping to assure resource adequacy. Under the proposals, all public utilities that own, control or operate interstate transmission facilities must file at certain dates following the final rule interim open access transmission tariffs that include bundled retail customers as eligible to receive service.

Further, all independent transmission providers must file SMD tariff. The commission intends to rely on these filings to ensure that all public utilities that own, control or operate interstate transmission facilities will be operating under SMD unless otherwise directed by the commission.

In making the proposals, the commission noted that its existing pro forma tariff allows undue discrimination in the provision of transmission services, with vertically integrated public utilities that own, operate or control transmission facilities and also participate in power markets still able to exercise market power and discriminate in providing service and spot market energy services.

The commission also noted that lack of standard market design allows undue discrimination within and across regions, can result in unjust and unreasonable pricing and transmission allocation, and permits the exercise of market power in short-term power markets.

In addition, proper price signals are not being sent to the marketplace, with the result that market-based rates in many places are distorted and appropriate infrastructure additions are not being built. The commission noted that several of these proposed changes promise greater customer access to low cost power.

It points out that customers in low cost regions can ensure that low cost power “stays home” by contracting for that power. This way, it is hoped that only excess power will leave the region.

Summary of Key Proposals

The commission proposed to:

o establish a single flexible transmission service, Network Access Service, with a single open access transmission tariff that applies to all transmission customers-wholesale, unbundled retail and bundled retail-as well as standard market design for wholesale electric markets;

o require transmission to be operated by an independent entity;

o adopt location marginal pricing (LMP), a market-based method for congestion management and provide tradable financial rights-Congestion Revenue Rights-as a means to lock in a fixed price for transmission;

o establish procedures to monitor and mitigate market power;

o establish procedures to assure, on a long-term regional basis, that there are adequate transmission, generation and demand-side resources;

o establish an access charge to recover embedded transmission costs that would be a demand charge billed on a customer’s load ratio share of the transmission provider’s cost, and would be paid by any entity taking power off the grid;

o establish a preference for the auction of Congestion Revenue Rights, but initially allow regional flexibility for a four-year transition period in determining whether to allocate Congestion Revenue Rights to existing customers or auction such rights with all auction revenues going back to customers paying an access charge;

o require public utilities that operate imbalance energy markets and transmission systems to be independent of market participants;

o permit customers under existing contracts, including bundled retail customers, to receive that same level and quality of service under standard market design that they receive under their current contracts, to the greatest extent feasible;

o facilitate real-time and day-ahead markets;

o adopt a new transmission pricing policy;

o provide for fair treatment of transmission capacity reserved for reliability;

o create a formal role for state representatives to participate in the decision-making processes of regional transmission organizations or other regional security and reliability entities; and

o more explicitly state in the pro forma tariff the obligations of transmission providers to comply with all appropriate standards for ensuring system security and reliability.

Together, FERC hopes these proposals will give the nation truly competitive markets with much-needed energy infrastructure, including transmission planning and expansion, investor price signals, and protection against market manipulation.