Update on APPA Activities at the Federal Energy Regulatory Commission FERC Sue Kelly VP, Policy Anal

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Update on APPA Activities at the Federal Energy
Regulatory Commission (FERC)Sue Kelly VP,
Policy Analysis and General CounselAmerican
Public Power Association2008 NEPPA Annual
ConferenceBretton Woods, NHAugust 11, 2008
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Twilight of the Kelliher Commission?

• We are certainly close to the end of the Bush
  Administrationsprint to the finish
• Chairman Kelliher could well leave FERC in 2009,
  especially if Ds win
• There is much speculation regarding prospects for
  Commissioners/Chair in the next Administration
  (be it R or D)
• Like most such Inside-the-Beltway gossip, it is
  largely speculation

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Legacy of the Kelliher Commission

• FERC had many responsibilities under the Energy
  Policy Act of 2005 (EPAct05) many rulemakings
  and studies on market manipulation, long-term
  transmission rights, reliability, demand
  response, mergers, books and records authority
• APPA did not agree with all of FERCs calls, but
  FERC met every deadline under EPAct05 in
  workman-like fashion

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FERC Implementation of Mandatory Reliability
Regime

• Initial mandatory reliability standards called
  for under EPAct05 now approved by FERC, but there
  is on-going standards-related activities at the
  North American Electric Reliability Council
  (NERC) and FERC
• Spotlight is now on compliance activities
  violations, penalties and registration disputes
• First round of penalties has issued more on the
  way so far our members have not been levied
  monetary fines, but that is bound to change

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Cybersecurity-The Next Reliability Frontier

• FERC has approved, subject to further NERC
  review, a set of Critical Infrastructure
  Protection (CIP) standards
• There is strong concern that there is a gap in
  NERC/governmental authorities to deal with
  imminent cyber-related threats to the bulk power
  system
• Legislative drafts are circulating in Congress to
  address this gap

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Implementation of EPAct05 Transmission Siting
Authorities

• APPA is supporting DOEs National Interest
  Electric Transmission Corridors (NIETC)
  designations in 9th Circuit Appeals Court
  (CA)precondition for use of FERCs backstop
  authority
• APPA is supporting FERCs backstop transmission
  siting regulations in 4th Cir. Appeals Court (VA)
  against challenges by states, landowner groups

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Implementation of New Merger and Affiliate
Transaction Authorities

• APPA/NRECA urged FERC to exercise its new EPAct05
  merger review and books and records authorities
  to protect consumers from cross-subsidization,
  market power
• We had some marginal impact on the new
  regulations, but FERC clearly leery of
  recreating PUHCA Public Utility Holding Co.
  Act of 35
• Government Accountability Office strongly
  criticized FERCs effort in March 08 Report
  called for improved vigilance

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Prohibition on Energy Market ManipulationFPA 222

• FERC now has authority to pursue manipulative or
  deceptive devices or contrivances
• FERC pursuing Brian Hunter/Amaranth for
  attempting to manipulate natural gas futures
  market, due to adverse impact on physical markets
  (which FERC regulates)
• APPA has supported FERC in jurisdictional spat
  with Commodities Futures Exchange Commission

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FERC in Clean-up Mode

• The Kelliher Commission also undertook a number
  of important rulemaking initiatives not required
  under EPAct 2005 it is now in the process of
  completing them
• Open Access Transmission Tariff (OATT) reform
• Market-based Rate Policy
• Standards of Conduct
• Review of RTO Organized Wholesale Markets

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Need to Reform Open Access Transmission Tariffs
(OATTs)

• FERC had found more than once during the RTOs or
  Bust era that Order No. 888 OATT still permitted
  undue discrimination in provision of transmission
  service
• Once it became clear not all regions would have
  RTOs, FERC had to deal with loopholes in
  individual Transmission Provider (TP) Order No.
  888 OATTs

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Order No. 890 (RM05-25)

• After Notice of Inquiry, Notice of Proposed
  Rulemaking (NOPR), many rounds of comments, FERC
  issued Order No. 890
• Required regional transmission planning process
  with substantial stakeholder input (applies to
  RTOs)
• More specificity in calculating Available
  Transfer Capability (NERC standard-setting
  proceeding)
• TPs must offer Conditional Firm/redispatch
  service
• Move to tiered energy imbalance penalties

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Order No. 890, con.

• Revised rollover/right of first refusal
  provisions terms lengthened but no additional
  flexibility on changing receipt points (APPA had
  argued for such flexibility)
• Lifted price cap on resales of long-term (one
  year or more) firm point-to-point (PTP)
  transmission service (even for resales by
  affiliates of the TP)
• Modified standards for credits for customer-owned
  transmission facilities, but retained the
  difficult-to-meet integration standard
• No generic implementation of FERC-Lite

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Order Nos. 890-A and 890-B

• APPA sought rehearing on three issues
• Lack of flexibility on receipt points for
  rollovers
• Lifting of cap on firm long-term PTP resales
• Retention of the integration standard
• Now at the end of the rehearing road only
  substantial change was that FERC limited sales of
  long-term firm PTP service at above price cap to
  period ending 10/1/10
• Have to decide on appeal this month

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Market-Based Rates (RM04-7)

• Docket ongoing since 2004, as FERC has wrestled
  with standards and tests for granting
  market-based rate (MBR) authority
• What tests to use for generation market power?
• What power supply products to test for?
• What is the relevant market area?
• What mitigation to apply to those who fail?
• What if seller flunks in home control area but
  not in surrounding control areas?

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Order No. 697

• FERC issued Order No. 697 in 06/07
• Sellers seeking MBR authority must pass two
  screens (uncommitted market share and
  uncommitted pivotal supplier) or submit full
  delivered price test
• Post-July 9, 1996 generators must pass tests too
• RTO region is default market, but geographic
  submarkets are recognized outside RTOs, the
  default market is the control area
• FERC will not test separately for long-term
  power supply products new entry will
  discipline market

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Order No. 697-A

• APPA/TAPS sought rehearing on long-term power
  supply issue, citing barriers to new generation
  entry
• Order No. 697-A issued in 04/08 denied rehearing
  on long-term power supply issue
• APPA has sought review of these orders in 9th
  Circuit (CA) will contest FERCs ruling on
  long-term power supply/lack of barriers to entry

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Standards of Conduct NOPR (RM07-1)

• FERC set out new standards of conduct (SOC) for
  transmission functions and merchant
  functions/affiliates of both electric
  transmission providers (TPs) and natural gas
  pipelines in Order No. 2004
• Natural gas interests went to court and won a
  remand FERC had gone too far in regulating
  relations with energy affiliates without
  sufficient evidence

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SOC NOPRSeeing Double

• FERC issued SOC NOPR in 01/07, narrowing prior
  rules but maintaining same general approach got
  an earful from industry on lack of clear
  standards, arbitrary enforcement
• FERC went back to the drawing board, issuing a
  revised NOPR in 03/08
• FERC is now proposing a functional approach
  employees of marketing and transmission functions
  must function independently (but not entire
  affiliates)

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APPA Comments on Second SOC NOPR

• APPA comments supported new approach
  employee-based approach works better for APPA
  members that comply with the SOC
• APPA did express concerns that proposed
  regulations would allow preferential
  communications in two areas
• Transmission planning (citing to Order No. 890
  transmission planning process)
• Upcoming availability of firm PTP (citing to
  Order 890 lifting of firm PTP price caps)

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APPAs Electric Market Reform Initiative (EMRI)

• Intended to first assess and then address the
  failures of restructured wholesale electricity
  markets
• First phase Investigate the operations of the
  wholesale markets and the claims of market
  supporters
• Second phase Grassroots campaign to obtain
  support from Congress for FERC to implement
  needed reforms

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FERCs Rulemaking on RTO Organized Markets

• FERC in 2007 opened investigation into
  centralized wholesale markets run by Regional
  Transmission Organizations (RTOs) in Docket Nos.
  AD07-7-000 and RM07-19-000
• FERC held series of technical conferences in the
  winter and spring of 2007
• APPA and its members participated actively in the
  conferences and filed comments, including all of
  the EMRI Studies then completed

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FERCs Advance NOPR

• FERC issued Advance Notice of Proposed
  Rulemaking (ANOPR) in 06/07
• Opined that consumers are benefiting from RTO
  markets, and that much of the concern can be
  traced to the effects of higher natural gas
  prices
• Proposed only limited changes in four areas
• Demand Response/Scarcity pricing
• Long-term Contracting
• Market Monitoring
• RTO responsiveness to stakeholders

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APPAs ANOPR Comments

• 09/07 Comments presented EMRI research results
  with sworn affidavits from Ken Rose (re limited
  impact of higher natural gas prices on RTO
  wholesale prices) and Ed Bodmer (showing high
  profits of PJM sellers)
• APPA asked FERC to broaden its proposed
  investigation to look at the justness and
  reasonableness of wholesale power prices in
  RTO-run centralized marketsthe core issue

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The 41 Party Motion

• In 12/07, APPA joined with 40 other load/consumer
  side interests asking FERC to expand its
  rulemaking to examine the justness and
  reasonableness of the rates charged in RTO-run
  centralized markets
• APPA was joined by AARP, NASUCA, CFA, ELCON,
  Public Citizen, PJM Industrials, many others
  (AARP, et al.)

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Full NOPR on RTO Organized Electric Markets

• FERC issued full NOPR in 02/08
• FERC denied APPAs and AARP, et al.s requests to
  broaden scope of proceeding
• Commenters offered no solutions (but see
  American Forest Paper Association and Portland
  Cement Association proposals)
• RTOs were instructed to consider the issues
  commenters had raised in stakeholder proceedings

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RTO Markets NOPR, con.

• NOPR would still require RTOs to implement
  proposed provisions limited to
• Demand response (by far the most sweeping of the
  proposals would allow scarcity pricing if
  operating reserve shortage arises)
• Long-term power supply contracting
• Market-monitoring
• RTO responsiveness to stakeholders

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APPAs NOPR Comments

• Filed extensive NOPR comments in 04/08 we expect
  a Final Rule this fall
• APPA argued, among other things, that
• FPA 206 does not require complainants to provide
  solutions to have FERC initiate an
  investigation
• Requiring the RTOs to consider claims regarding
  the justness and reasonableness of their own
  rates constitutes an unlawful delegation of
  functions by FERC

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APPAs NOPR Comments, con.

• Regarding the four designated topics
• Opposed use of scarcity pricing to incent
  demand response more likely as proposed to
  enrich generators and incent shortages
• Opposed aggregators of retail customers (ARCs)
  dealing directly with end users behind public
  power systems unless the system enacted a
  regulatory policy prohibiting this practice
  should flip presumption
• Pointed out FERC cant do much to support
  long-term contracting without tackling RTO market
  structures

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APPA NOPR Comments, con.

• Suggested that the PJM market monitoring
  settlement set best practices on RTO market
  monitoring issues
• Suggested ways RTOs could improve governance and
  management to be more responsive to end use
  consumers (stakeholder advisory committees,
  hybrid boards, cost-benefit analyses, mission
  statements, management compensation)

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• The Campaign for Fair Electric Rates is a
  grassroots advocacy effort focused on educating
  consumers and businesses as well as Members of
  Congress and other policymakers, on the failure
  of the wholesale electricity markets operated by
  regional transmission organizations (RTOs) to
  adequately protect consumers. Participants are
  encouraged to contact their Senators and
  Representatives asking that Congress urge FERC to
  reexamine the changes made to the wholesale
  electricity markets over the last few years and
  take all necessary steps to protect consumers
  against unjust and unreasonable rates.

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• The Campaign for Fair Electric Rates believes
  that reform to RTO-run markets should adhere to
  the following criteria
• 1. A market structure that produces just and
  reasonable prices, is fair to all market
  participants, and where the benefits of factors
  such as fuel diversity and operational
  efficiencies are shared equitably between
  consumers and suppliers.
• 2. Improved and more timely transparency and
  accountability to consumers
• 3. A consumer-focused system that assures
  reliability and capacity growth to meet our
  future needs

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• The following are among the organizations
  supporting the Campaign
• American Public Power Association
• Blue Ridge Power Agency
• Citizens Utility Board
• Electricity Consumers Resource Council (ELCON)
• Industrial Energy Users Ohio
• Maryland PIRG
• Municipal Electric Utilities of Wisconsin
• NEPOOL Industrial Customer Coalition
• Northeast Public Power Association
• Ohio Hospital Association
• Ohio Partners for Affordable Energy
• Portland Cement Association
• Power in the Public Interest
• Public Citizen
• Consumer Federation of America

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• The Campaign has launched a website
  www.fairelectricrates.net
• Individuals can visit the website, learn more
  about wholesale market problems and how they are
  impacting their utility bills, share their
  stories on how high electricity prices are
  impacting their families and communities, and
  learn how to communicate their concerns locally
  and to their Members of Congress

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Other APPA RTO-related Advocacy Activities at
FERC--RPM

• PJMs Reliability Pricing Model (RPM) In
  response to cries of pain from members in PJM,
  APPA (via EMRI) commissioned an RPM study by Jim
  Wilson of LEGC
• His study formed basis of affidavit supporting a
  customer complaint against PJM regarding outcome
  of first four transitional RPM auctions (26.2
  billion in customer obligations!)
• APPA has intervened in support of the customers
  complaint

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Other RTO Advocacy Activities at FERC-Market
Manipulation

• APPA has supported PJM complaint against the
  Tower Companies (hedge fund hanky-panky creates
  80 million revenue deficiency on counterflow
  FTRs)
• Challenging FERC settlement with Edison Mission
  re bidding behavior in PJM market (high offer
  strategy) is it OK to withhold generation so
  long as you dont lie about it!?

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Other Advocacy Activities at FERC-Market
Manipulation II

• Seeking broader FERC investigation into Lake
  Erie loop flow situation in NY ISO circuitous
  transmission service nominations by certain
  unnamed parties inflated uplift charges and
  LMPs, at expense of NY consumers
• Who did it, why and how much have others had to
  pay?

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Our Mission

• Electric rates are going up due to increased
  costs of fuel, construction costs, costs of
  complying with environmental and carbon
  regulations
• We need to ensure that cost increases to
  consumers are justified, and not the result of
  market power/manipulation, lack of oversight, bad
  market design, faith-based regulation
• We need to support new infrastructure, not just
  ration scarce resources

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• www.appanet.org