FERC Market Design White Paper

May 2, 2003

Introduction

FERC released its White Paper on what it is now calling its Wholesale Power Market Platform (formerly Standard Market Design or SMD) on April 28. It is intended as a preview of the decision on the final SMD rule, and responds to a number, but not all, of the major policy criticisms of the SMD proposal. It attempts to refocus the discussion onto modifications to Order 2000, FERC's RTO order.

The White Paper invites comments and notes that further technical conferences will be held on the White Paper issues, but includes no deadline for responding. On April 30, the Senate Energy Committee voted to include a provision in the Energy Bill that would preclude FERC from issuing a final rule on the SMD NOPR before July, 2005. The significance of the White Paper will likely depend on the further progress of the legislation. This summary describes the major points of the White Paper and the issues raised if the proposal goes forward.

Summary

The White Paper said the final rule will:

Focus on RTOs and require all public utilities (IOUs) to join an RTO or ISO, in a change from Order 2000, in which RTO participation was voluntary. It will allow phased-in implementation and if specific features of an RTO do not pass a cost-benefit test, FERC will not require their implementation. It recognizes the value of allowing multiple RTOs as long as they actively pursue interregional coordination and can present a single market from the customer's perspective.
Not assert jurisdiction over the transmission rate component of bundled retail sales, but will assert jurisdiction over transmission terms and conditions by requiring all RTO terms and conditions to apply equally to all users, including those users serving bundled retail service. It will allow state regulators to seek waivers of the RTO's non-price transmission terms and conditions that are incompatible with bundled retail service needs.
Create a role for Regional State Committees (formerly designated Regional State Advisory Committees) that would participate in RTO decision-making, and have primary responsibility for a number of issues important to states. These are:
- Determining the regional proposals for cost responsibility, including whether participant funding would be used for new transmission and whether license plate or postage stamp rates would be used for access fees;
- Determining whether firm transmission rights would be allocated to customers or assigned;
- Overseeing the transition process to ensure that existing rights holders get equivalent firm RTO transmission rights, including rights for load growth; and
- Determining the resource adequacy approach that will be used across the region.
Allow export fees in cases of notable imbalances in payments between RTOs, if no mechanisms can be arrived at to eliminate the export fees, rather than requiring elimination of pancaked export fees in all cases.
Not include a minimum level of resource adequacy. The approach to and level of resource adequacy would be set by the regional state committees described above.
Not require any particular form of congestion management (i.e., will not require LMP-based approaches), but will require congestion management approaches meet certan principles in order to have transparent market mechanisms with efficient price signals and to be compatible within an interconnection. The White Paper will require RTOs to operate real-time imbalance energy markets from the beginning and day-ahead and ancillary service markets conditionally[1].
Reiterate the need for RTO independence.
Add further standards for market monitoring and market power mitigation to those in Order 888 and the SMD NOPR.
Reiterate that previously approved RTO elements will not be overturned.
Not change the definition of reciprocity (which is the mechanism by which these FERC orders apply to non-jurisdictional transmission providers, such as PMAs and municipals), from that in Order 888 and Order 2000. This means essentially that joining an RTO would be voluntary on the part of these non-jurisdictionals.
Include a provision limiting the liability of RTOs and transmission providers under RTOs (a provision that was viewed as crucial by RTO West participants).

Issues

While FERC has addressed a number of specific issues raised by commentors, and in particular, a number of issues raised regarding protection of existing transmission rights, including for native load, and regional diversity, there are several basic issues that remain.

Jurisdiction: The question about jurisdiction has probably not been resolved despite FERC's attempt to do so. While most states (among others) were concerned about the potential for existing customers (contract and native load) to lose transmission rights, including rights for load growth, in the transition, they were also concerned about their ability to control the change in status of utility transmission assets, i.e., from utility to RTO and from state to federal jurisdiction. FERC's residual claim on jurisdiction, despite allowing states to make decisions on a number of specific items, does not change the nature of the fundamental jurisdictional dispute. The problem would be highlighted by the proposal to make RTO participation mandatory for jurisdictional utilities.

State Role: There is a further potential difficulty about FERC's characterization of the role of the states. Currently, states act independently with regard to the service territories of utilities under their jurisdiction. The White Paper calls for formal state participation in decision making through entities called Regional State Committees, which do not currently exist. They would have to be created and rules for their decision-making worked out. CREPC, for instance, is a consensus-based discussion organization rather than a decision-making organization.

Reciprocity: If RTOs are mandatory for public utilities and non-jurisdictional transmission owners choose not to participate, there could easily be significant problems at the seams between RTOs and non-participating owners. Perhaps recognizing this problem, the White Paper devotes half a page to noting Bonneville's issues and concerns, committing to work with Northwest parties to find regionally appropriate solutions and encouraging Bonneville's continued participation in RTO West.

[1] One section of the White Paper conditions these steps (day-ahead and ancillary service markets) on the market being ready and another on the benefits exceeding the costs.

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