APPA’s Competitive Market Plan: A Reform Proposal

1. APPA’s Competitive Market Plan: A Reform Proposal Susan Kelly VP, Policy Analysis and General Counsel, APPA AAI 9th Annual Energy Roundtable March 3, 2009

2. Started in 2006 at direction of APPA Board Commissioned series of studies on different aspects of RTO markets; available at www.APPAnet.org/emri.cfm Entered those studies in the record of the FERC’s NOPR on RTO Wholesale Markets (Docket No. RM07-19-000) Despite substantial load-side concerns expressed in that docket, FERC “stayed the course” on RTO market design (although rehearing is still pending) APPA’s Electric Market Reform Initiative (EMRI)

3. “. . . [T]hose entities that have such concerns have a responsibility to propose solutions to address those concerns. For example, American Forest submitted comments that contained a mechanism, the Financial Performance Obligation (FPO), to address concerns that they raised regarding the structure of organized markets. Portland Cement Association, et al., also included a proposed solution in its comments to address their concerns regarding the organized markets. We are encouraged by entities that actually propose solutions rather than merely identify concerns without proposing any meaningful ways to address those concerns.” February 22, 2008 RTO Markets NOPR at P 25 “Whiners with No Solutions”

4. Issued February 20, 2009; available at http://www.appanet.org/files/PDFs/EMRICompetitiveMarket.pdf Our attempt to address the most pressing problems with RTO markets identified by the EMRI studies, while preserving vital features of the market (and the software!) NOT what we would have recommended were we starting from scratch (and NOT recommending this approach for non-RTO regions) APPA’s Competitive Market Plan

5. Trim back ahead/real time market to an “optimization” market; reduce market power exercise by making it a single clearing price (SCP) market based on actual short-run marginal costs Phase out locational capacity markets in favor of LSE resource portfolio requirements, including both owned and contracted-for supply and demand resources The Plan in One Slide

6. Offers to sell both energy and ancillary services, including demand response Generator bids limited to short-run marginal costs, with information supplied to MMU to support the bids; demand response is a price taker; SCP retained Must offer requirement (limited run exception) Bids made public the next day, including identities of bidders The Optimization Market

7. LSEs would have to develop resource portfolios that support overall RTO supply adequacy for series of out years RTO would set overall requirements; states would determine how regulated LSEs meet those requirements—mix of fuels, demand/supply, owned v. contracted for, LSE by LSE or jointly Generators could use their market-based rate authority to enter into bilaterals Resource Adequacy Requirement

8. Allocations of Financial Transmission Rights (FTRs) should accord with approved LSE supply resource plans, with preference for long-term FTRs to support long-term power supply arrangements (owned or bilateral) Transmission should be planned and constructed to support long-term power supply arrangements Transmission Planning and Construction

9. Kept the SCP market (but relook after 3 years to make sure it is working as anticipated) Kept market-based rate authority for bilateral market (again, a 3-year relook) More support for longer-term bilaterals that could support new generation resources State supervision of LSE resource procurement to ensure fair competition What We Included for Generators

10. Eliminate more egregious bidding practices seen in day ahead/real time markets (hockey stick bidding, etc.) Phase out expensive locational capacity markets Increase competition by requiring suppliers to bid directly against each other for the opportunity to serve load What We Included for Customers

11. Opportunity to work collaboratively with RTO to set regional adequacy requirements Opportunity to help determine how state-regulated LSEs will meet those requirements (more state control) Will require “morning after” relook at retail access and whether it is working, especially for residential customers/default service provision What We Included for States

12. APPA has believed for some time that a regime that better supports bilaterals is required to foster new supply resources Recent financial meltdown seems to have given us more company in this view Market structure must balance incentives and obligations for generators and loads; if one side is unduly disadvantaged, there will be no peace and therefore no stability Our Goal—A More Balanced Market Regime

13. “Above all, APPA intends by proposing its Plan to start a rational debate about the future of RTO markets—a debate the industry badly needs to have.… The debate should no longer be about who can best massage the statistics or whether it is more virtuous to support “competition” or “regulation.” Instead, the industry must work together to develop a regulatory regime for electricity markets in RTO regions that will truly benefit consumers, businesses and the environment. Unless the electric utility industry and its regulators can agree on a market design and regulatory paradigm that fairly balances the interests of both load and generation, the industry will be condemned to continued upheaval.” APPA Competitive Market Plan at 39 We Need to Have This Debate