FERC's
Wood tells how markets
helped Midwest reliability
FERC Chairman Pat
Wood noted a long list of lessons FERC has learned while trying to guide
formation of unbundled markets.
Wood told NEMA marketers of a new one:
Markets enhance reliability.
When a high-voltage line went down on the second
day of the Midwest ISO's launch the brand new grid operator didn't have to call
for a TLR.
MISO looked at the LMPs, redispatched load and
fixed the problem in about eight minutes, Wood related, instead of curtailing
load in a market that was only hours old.
That saves money for customers, Wood observed.
It's "pretty impressive" that
competitive markets create more choices for customers and improve reliability,
Wood said.
The chairman praised retail marketers for
"keeping the faith" and helping to create competitive markets.
Marketers have seen through the haze and found a
way to make money by making customers happy, he added.
He quoted a study that found where a non-organized
market moves to central dispatching, it can expect savings of about 23%.
Thus SPP will save about $1.2 billion over 10
years by moving to central dispatch while GridFlorida costs would fall by $980
million over the same period.
That revelation caused several retailers eyes to
widen as that would mean they could use those savings as part of their
competitive offers to retail customers.
The chairman came out in support of nodal pricing
noting the system creates greater transparency that allows regulators to see
market weakness and spot misbehavior.
Wood's public support of nodal pricing comes at a
good time for ERCOT that is close to adopting an LMP system despite growing
opposition.
Energy-only markets aren't sending all the price
signals needed to spur investment, Wood explained.
One of the lessons FERC has learned stems from
five years ago when developers were building new capacity but not where it was
needed.
Maine built lots of capacity but it was southwest
Connecticut that needed it, Wood recalled.
Yet New England quietly but successfully switched
to LMP in 2003, he noted.
MISO too, is using LMPs effectively despite
everyone worrying that the region had never before worked together, Wood
reported.
Some stakeholders that support competitive markets
have been voicing concerns including the problem of financial transmission
rights (FTR).
If passed, the House version of the energy bill
would direct FERC to come up with rules to foster long-term FTRs.
FERC is already looking at the problem.
The FTR probe is separate from the grid-pricing
policy, Wood told reporters after his speech.
New York does a lot of economic grid planning,
Wood said.
He expects most transmission to stay regulated in
the next few years.
The rare exceptions will be lines such as the
promised Neptune project and the completed Cross Sound upgrade that serve as
interties from RTO to RTO.
"AC merchant transmission is going to be very
difficult to build," Wood conceded, without eminent domain and siting
authority.
Some constraints are economic, the chairman
admitted, but he still sees many non-economic transmission projects being
ignored by investors.
This leads Wood to support the idea that RTOs
should take the lead in requiring that some upgrades be undertaken for economic
reasons.
The sticky issue is who pays.
In New York, building just for reliability will
keep the market "pinched" and more constrained than it otherwise
should be, he observed.
Transmission is the smallest part of customers'
bills but it's very important in fostering commerce that benefits retailers and
retail customers, he noted.
Wood touted the new commission philosophy that
transmission should be built that supports a competitive market but doesn't fall
under either economic or reliability definitions.
Competitive generation needs some elbowroom to
"really thrive," he explained, and should be included in the planning
process.
Finding solutions to the thorny problems plaguing
capacity markets might start with raising energy market caps, Wood suggested.
Australia's cap is about $8,000, he noted.
Wood likened ICAP/LICAP to having all automobile drivers buy insurance.
Government has to make sure that everybody in the
electricity markets pays their fair share.
But getting the capacity market rules right has
proven difficult.
ICAP/LICAP has dampened the effort to achieve
"robust" demand participation (DR) in the wholesale and retail
markets, Wood lamented.
Getting the right signals to bring about a demand
response will cause most worries regulators have to "fly right out the
window," he said.
The problem is that the markets are stuck in a
"vicious cycle" where energy prices are capped and DR has become an
ISO administrative program rather than a natural response to higher prices, Wood
explained.
That way you can't get high prices to trigger the
desired demand response, Wood said.
Raising the price cap could be a solution but
don't forget the political fallout that would happen when prices hit $5,000, he
stressed.
Wood did let out a big "whoop" when
asked for a reaction to President Bush's declaring that the White House would
submit its own LNG provision to the Senate giving FERC sole sitting authority.
The White House's lobbying support behind FERC
will enhance the chances for the provision's survival.
Originally published in Restructuring
Today on April 28, 2005
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