How energy regulators can ensure that electricity producers play fair and don’t put customers on the hook for uneconomic operating practices...
In this series, we’ve been discussing the problems created when utilities - dispatch coal plants out of merit order, or non-economically. Not only is it costly ($3.8 billion from 2015-2017, but it also undermines competition by suppressing the market revenues that would otherwise support development of clean energy resources and more efficient traditional generation. Uneconomic dispatch practices have festered where older models of utility-owned generation have partially (but not fully) given way to restructured electric markets. In particular, we find that non-economic dispatch where rate-regulated utilities operate in wholesale electricity markets. In this regulatory no man’s land, state utility regulators would like to believe that wholesale markets ensure least-cost dispatch to the benefit of consumers. And on the other side of the coin,federal regulators and grid operators have generally tolerated anti-competitive behavior in rate-regulated generators, believing it to have little overall impact on the market. But Sierra Club’s new paper shows that the status quo imposes real costs on retail ratepayers like residential customers, schools, and small businesses. It also makes it more difficult for competitive clean energy sources to compete, and distorts the larger energy system.
Both state and federal regulators need to step up to address this problem, and level the playing field for energy producers by bringing their complementary tools to the task. As an example, state regulators have authority to deny recovery of ratepayer funds for plants that operate imprudently, and federal regulators can ensure that energy market rules require energy market offers to reflect the full production cost of rate-based units. At the outset, both have the ability to investigate the problem more comprehensively and explore a range of remedies.
What can state utility regulators do?
State public utility commissions (a.k.a. PUCs/PSCs) can play a key role in both illuminating and deterring uneconomic dispatch and self-scheduling practices. Not only do they have general jurisdiction to investigate and analyze utility practices, but they can also disallow unreasonable costs when setting the rates that utilities get to charge their customers.
Rate-regulated utilities have little incentive to avoid uneconomic dispatch, or the resulting anti-competitive outcomes. This is especially true if state commissions routinely grant full recovery of operating costs from captive retail customers. In fact, rate-regulated utilities may have an incentive to keep dispatching uneconomic plants, such as demonstrating that an aging plant is still ‘used-and-useful.’ However, if state commissions disallow the avoidable, excessive costs that result from uneconomic self-commitment and dispatch, utilities would face a powerful incentive to discontinue perverse self-scheduling habits.
The fundamental regulatory tool at state commissions’ disposal is a “disallowance.” A bedrock principle of cost-based ratemaking is that public utilities rates are set no higher than a ‘just and reasonable’ amount, which means that utilities are not allowed to charge more than needed to serve customers reliably and to earn a reasonable rate of return. So when utilities elect to operate coal plants uneconomically, when they could have responded to market signals (without sacrificing reliability or safety), commissions should disallow these excess and unreasonable costs from rates. As a practical matter, this disallowance pushes excessive costs back to utility equity investors, sending a powerful signal that consumers will not subsidize non-economic behavior.
State commissions can conduct this inquiry in a range of proceedings, from general rate cases to more focused fuel adjustment or purchased power proceedings. For example, Sierra Club recently advocated for the disallowance of unreasonable costs stemming from uneconomic dispatch and self-commitment through expert testimony before the Arkansas Public Service Commission in a recent rate case.
Encouragingly, some Commissions have been receptive to this argument or have even commenced investigatory dockets proactively. In Missouri, for example, the Public Service Commission initiated an investigation into the dispatch practices of state’s several public utilities. This investigation docket provides an opportunity for the Commission to begin understanding the nature of uneconomic dispatch from self-scheduling. It also allows for an open discussion and development of standards for determining reasonable dispatch practice, and allowable costs in the future.
What can federal regulators do?
Self-scheduling is a practice that affects wholesale energy revenues. We assessed that in 2017, self-scheduling depressed locational marginal prices (LMPs) by 30% on average in MISO market region, a wholesale energy market covering 16 midwest US states. The Federal Energy Regulatory Commission (FERC) is responsible for ensuring that energy prices for interstate commerce are just and reasonable, and not unduly discriminatory, a responsibility that involves making sure that the market rules are fair - and that market participants are sticking to the rules.
It’s an open question whether, or to what extent, FERC has jurisdiction over self-scheduling practices. However, the Commission should almost certainly better inform itself about self-scheduling practices and the impact of those practices on wholesale market revenues and competition. Self-scheduling implicates the reliability of the bulk electric system--another core responsibility of the Commission. High penetrations of inflexible, self-scheduled resources reduce the grid operators’ options to balance supply and demand, and can lead to problems during times when customer demand drops.
As a center of gravity for regulatory research and support, FERC could hold technical conferences on the prevalence of self-scheduling practices, how the practice impacts markets, and what mechanisms are in place to track it. Technical conferences enable FERC to explore emerging issues outside the time pressure and limited communication opportunities of a litigated docket. For example, in 2017, FERC held a two-day technical conference to explore the impacts of state public policies on wholesale markets. FERC could examine if self-scheduling impacts or undermines investment signals, or if market design changes, such as multi-day ahead markets, could abate the problem. Because self-scheduling is an issue that centrally concerns states’ responsibilities, FERC could also choose to initiate a collaborative with the National Association of Regulatory Utility Commissioners, as it did to explore demand response and smart grid issues that involved areas of both federal and state authority and interest.
The regional transmission organizations like MISO are not regulators, but play a key role in evaluating the effectiveness of their market designs and adherence to market rules. Likewise, independent or external market monitors assess and report on market behavior. These independent monitors are often essential in highlighting practices or market rules that undermine competition. RTOs and market monitors could begin to explore this problem by gathering and publishing comprehensive public data on self-scheduling--such as what percentage of total system generation self-scheduled output makes up during different hours and different zones. They could initiate stakeholder processes to better understand legitimate uses of self-scheduling, and its impacts on consumers and independent power producers.
While uneconomic dispatch is a problem that has largely fallen through the cracks between standard federal and state regulatory oversight, this is beginning to change as more state commissions and market monitors begin to explore the issue. We hope this paper will stimulate more such inquiries and the development of incentives, both carrot and stick, that will maximize the benefits of electric competition for consumers.
-Casey Roberts and Matthew Miller, Sierra Club Environmental Law Program