FERC's Wood tells how markets helped Midwest reliability

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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