Lecture2-Ratemaking and Policies

8/8/2019 Lecture2-Ratemaking and Policies

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UtilityRatemakingandPolicies:Issues,OpportunitiesandChange

BarbaraKatesGarnick,Ph.D.

Lecture 2: EL 6623


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this

lecturego

to

Professor

Paul

Joskow

of

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,

organization;federal

v.

state

regulation

service,

revenue

requirements,

rate

design

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4


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Distributionlines

Distributionsubs

SEGMENTS

Transmissionsubs

Transmissionlines230500 V

Networkswitchyard

Generator

Stepup

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Generation of Electricity

Fossil-fired

Coal (50%)

Oil (3%)

Nuclear (19%)

Hydro (7 %)

Renewable (2%)

Distribution of Electricity

low voltage delivery

Transmission and System Operations

transportation

dispatch and coordination

operat ng reserves

inter-area coordination

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Consumers

Vertical Integration + Monopoly + COS Regulation

GeneratingUnits

TransmissionNetwork

DistributionOperationsand

Dispatch

Other Control Areas

Wholesale Market

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WHYWHOLESALEANDRETAIL

Goalistoprovidelongrun netbenefitstosociety

rov e e er ncen ves orcon ro ngcap a an opera ngcos so

newand

existing

generating

capacity

Encourageinnovationinpowersupplytechnologiesbyeliminating

Shiftrisksofmistakestosuppliersandawayfromconsumers

Support

retail

prices

that

reflect

marginal

production

cost

including

thecostsofcon estion losses andscarcit

Provideenhancedarrayofretailserviceproducts,riskmanagement,demandmanagement,andopportunitiesforservicequalitydifferentiationbasedonindividualconsumerpreferences

Facilitatebetter

regulation

of

residual

monopoly

services

to

enhance

efficiencyincentivesandreduceT&Dcosts(broadlydefined)

Consistentwithenvironmentalandreliabilitypolicygoalsusing

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TRADITIONALINDUSTRY

STRUCTURE

+PURPA

GENERATION GENERATIONQFs QFs

TRANSMISSION

Short Term Wholesale

Trading

DISTRIBUTION DISTRIBUTION

Power Pooling and Jointly-

Owned Generating Plants

Muni/Coop

RETAIL CONSUMERS RETAIL CONSUMERS

10January26,2010


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TRADITIONALINDUSTRYSTRUCTURE

+ + c

GENERATION GENERATIONQFs QFs

TRANSMISSION

Short Term Wholesale

Trading

EWG

DISTRIBUTION DISTRIBUTION

Power Pooling and Jointly-

Owned Generating Plants

EWG

Muni/Coop

RETAIL CONSUMERS RETAIL CONSUMERS

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STATUSOFRETAILCOMPETITION

2004


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UNUSUALATTRIBUTESOFELECTRICITYDEMAND

AND

SUPPLY Demandvarieswidelyfromhourtohouroverthecourseofagivenyear

Differencebetweenpeakdemandandtroughdemandafactorofabout3

thatarebasedonaveragecostratherthanmarginalcost(littlepeakloadpricing)

Electricitycannotbestoredeconomically Enoughcapacitymustbebuilttoservepeakdemandinrealtime(justin

timegeneration)

Some

capacity

is

used

very

few

hours

in

a

typical

year , ,reactivepower,stabilityconstraints

Thetransmissionnetworkbecomescongestedatparticulartimesandparticularplacesandscarcecapacitymustberationedcontinuously

ys cs

o

networ s

mp es

t at

power

ows

over

t e

pat s

o

east

resistancenotpointtopointbetweenaspecificgeneratorandaspecificcustomer(loopflow)

Consumersfindsuddenblackoutstobeverycostly(VOLL)


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New England Monthly Peak Loads (2006-2007)

30,000

20 000

25,000

15,000MW

5 000

10,000

-

Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb-

06 06 06 06 06 06 06 06 06 06 06 07 07


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New England Load Data February 9, 2007

25000

20000

10000

MW

5000

8:30AM:

01 10 19 28 37 46 55 64 73 82 91 100 109 118 127 136 145 154 163 172 181 190 199 208 217 226 235 244 253 262 271 280


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FIGURE12

Source:

NewEngland

ISO


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Im ortant

Conce ts

electricsystem

at

a

particular

time

duringadesignatedperiodtopeakload high

StrandedCosts:Coststhatautilityhas

ncurre

nregu ate

mar et

t at

are

not

recoverableinacompetitiveone

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Residential 35% (8.3 cents/kWh)

Commercial 29% (7.4 cents/kWh)

n us r a . cen s

Other 3% (6.8 cents/kWh)

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Average U.S. Electricity Prices 1960-2005 ($2000)

Residential Price Industrial Price STATE PROGRAMS

10

12 PURPA EPAct92 Order 888 RTO-SMD

6

8

Cents/kWh

2

4

0

1960

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

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EIAAEO

(2007) 24


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EIAAEO

(2007) 25


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Traditional obligation to serve carries with it obligation to plan for and meetthe needs of native load customers

Ten year demand forecasting

Target planning reserve margins based on tiny shortage probability

Build (or contract for) generation and transmission capacity necessary to meet

forecast load with adequate reserves

In some states incorporate Demand Side Management (DSM) programs intoplanning (integrated resource plan)

Level of state supervision and formality of planning varies widely

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Retailpricesvariedwidelyacrossthecountrypriorto

Fuelprice

differences

CapitalcostdifferencesRegulatoryaccountingforcapitalcostsWeatherdifferencesandassociateddifferencesincapacity

utilizationAccesstofederallysubsidizedhydroelectricpower Investmentsinnuclearpowerduringthe1970sand1980s

Retailprices

still

do

vary

widely

across

the

country

despiteyearsofcompetitioninitiatives

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U.S.STATEMILESTONES

,wholesaleandretailcompetition

Firstmoverstatesadoptedcomprehensiverestructuring

Generationdivestiture Unbundlingandretailcompetition Su ortFERCwholesalere ionaltransmissionandwholesale

marketdesignchanges

Allowedforstrandedcostsrecovery

Transitiondefault

service

prices

Secondmoverstatesoftendidnotrequiregenerationdivestitureandphasedinretailcompetition

By2000itappearedthatreformswouldsweepthecountry

Severalstates

that

had

begun

to

implement

liberalization

programsreversedordelayedafterCaliforniamessin20002001

Nonewstateinitiativessince2000


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TodaysRegulatoryFocus:Efficiency,Distributed

enera on,

ecoup ngan

eman

esponse

Goingbeyondnotionsofderegulation.Competitionnowbroadenedtomean

awaytoprovidemorecontrolanddecisionmakingtothecustomer

Goalto

lower

the

peak

Decou lin =disconnectin rofitsandfixedcostrecover fromsalesvolumes

Traditionallyutilitieshavehadtheincentivetoincreaseretailsalesand

tomaximize

throu h ut

Allowsratestofloatupanddownwithlevelofsalessothatearningsnottiedtosales;thuspromotesenergyefficiency

leastcost

resource,

and

valuable

as

means

to

reduce

congestion

and

for

riskmanagement;canreplaceordelaybuildingofapowerplant

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Demand Res onse

DR=customerreducesconsumptionatcriticaltime inresponseto

supplyconditionsormarketpricing emergencyoreconomicDR

Sinceutilitiessizedtomeetthepeak,DR,byloweringpeakdemand

Electricityconsumption/supplymustbeinbalanceatalltimes;generationsizedtowardmeetingpeak.Operatorsusecheapestgenerationfirstand

thenuse

additional

ca acit

from

more

ex ensive

lants

as

needed

2007study(BrattleGroup)showedthat5percentdropinpeakdemandwouldprovideenoughgenerationandt&d savingsto

EstablishedtechnologyincompanieslikeComverge andEconogy

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reducesamount

of

energy

lost

in

transmission

Oftensmallscale(3kwH10,000kwH)and/or

Issueslinkedtorestructuring,competition,

re a ty,env ronment

Growthpotentialovernextdecade

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Federal Power Act (1935 + amendments)

Historically, FERC regulated a very small fraction of electricity industry Regulates wholesale power transactions based on just and reasonable criterion

Sales of power by vertically integrated utilities to unintegrated distributors

(e.g. muni)

Sales of power by independent generators to marketers and utilities Requirements contracts wit unintegrate /partially integrate istri utors

Rate of return regulation though obligation to serve is vague

Coordination arrangements

Sales between inte rated utilities

In theory cost-based. In practice negotiated in most cases Market-based pricing

More recent interpretation of FPA

sence o mar e power

Congress has never deregulated wholesale power transactions

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FERCREGULATION Federal Power Act (1935 + Amendments) [continued]

FERC regulates prices for transmission or wheeling service

Firm vs. interruptible supply contracts

Postage stamp rate per system

Transmission pricing arrangements changed dramatically after 1996

but still in flux

No statutory obligation to serve prior to 1992

No federal planning oversight or certification for transmission Antitrust laws may have created de facto obligations in some cases

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Federal Power Act (1935 + amendments)

Historically, FERC regulated a very small fraction of electricity industry Regulates wholesale power transactions based on just and reasonable criterion

Sales of power by vertically integrated utilities to unintegrated distributors

(e.g. muni)

Sales of power by independent generators to marketers and utilities Requirements contracts wit unintegrate /partially integrate istri utors

Rate of return regulation though obligation to serve is vague

Coordination arrangements

Sales between inte rated utilities

In theory cost-based. In practice negotiated in most cases Market-based pricing

More recent interpretation of FPA

sence o mar e power

Congress has never deregulated wholesale power transactions

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EXPANDING C MPETITIVE PP RT NITIE

PURPA (1978)

es mus uy power rom cer a n ua y ng ac es

Cogeneration and renewable energy

Original motivation was to promote energy efficiency/environmental improvement

Avoided cost pricing principle

Some states embraced PURPA with great enthusiasm (CA, NY, MA, NJ, RI, ME, PA)

Long term contracts at very high prices

Showed that independents could build power plants that worked

FERC REGULATORY INITIATIVES TO PROMOTE WHOLESALE COMPETITION

Non-QF IPP initiatives

Market-based pricing concepts

ENERGY POLICY ACT OF 1992 Expanded FERC authority to order transmission service and associated terms

FERC Initiatives to promote wholesale competition and support state retail competition

COMPETITION

Beginning in mid-1990s but diffusion stopped after 2001 36


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EXPANDINGWHOLESALECOMPETITION

EnergyPolicyActof1992

FERCauthorityoverunbundledtransmissionservice

Unregulatedgeneratingplants(EWG)

FERCOrder

888/889/890

(1996,

2006)

OpenAccessTransmissionTariffs

OASIS

FERCOrder2000(December1999)

Formationof

RTOs:

Independence

and

Consolidation

BasicWholesaleMarketandTransmissionPricing,PlanningandInvestmentPrinciples

StandardMarketDesign(SMD)Proposal(2002)

PJM

for

All WholesaleMarketPlatformWhitePaper(2003)

FERCBacksoffSMDandreturnstoOrder2000

MerchantGeneratorInterconnectionRules(2003)

EnhancedFunctionalSeparationsRulesforTransmission(2004)

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ISO/RTOsintheUnitedStates2005

NYISO

PJMSPPCAISO

ERCOT

Source: StateoftheMarketsReport2004,FERCOfficeofMarketOversightand

Investigations

(2005,

page

53).


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Table 1. Independent System Operators and

Organized Wholesale Markets 2005

System Operator Generating

Capacity

(MW)

ISO-New England (RTO) 31,000

New York ISO 37,000

PJM ex anded RTO 164,000

Midwest ISO (MISO) 130,000

California ISO 52,000

ERCOT (Texas) 78,000

Southwest Power Pool

(RTO)[1]

60,000

_______

,

_______

Total U.S. Generating

Capacity

970,000

[1]Organizedmarketsbeingdeveloped


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MAJORCONGESTEDINTERFACES

Source:

Platts


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IndependentSystemOperator/Regional

ransm ss on

perator

ISO RTOcoordinates controlsandmonitorsoperationofpowersystem;alsooperateasamarketplace

for

wholesale

power;

established

as

non

profits

FERCOrders888and889definedhowIPPsand

andmandatedimplementationofOpenAccessSameTimeInformationSystem(OASIS)

RT0s=ISO

NE,

MISO,

PJM,

Southwest

Power

Pool;

ISOs=AESO(Alberta),NYISO,CAISO,ERCOT.IESO

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Suppliers enerators AncillaryServiceSuppliers DemandSideResources

PowerExchanges TransmissionCustomers

LoadServingEntities(LSEs)

Municipalities

Cooperatives

IndustrialCustomers

Commercial

Customers

Marketers

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Sim lified Descri tion of Biddin

TheNYISOfacilitatesandadministersthemarketsforinstalledcapac y,energy,anc aryserv ces,an ransm ss onconges on

contracts.

The

NYISO

also

administers

the

scheduling

of

firm

and

nonfirm

point

to

point

transmission

service

and

Network

Inte rationTransmissionService.

MarketParticipantsmaysubmitoffersonadayaheadandrealtimebasisforgeneration,andbilateraltransactions.Loadsmay

submitbids

only

in

the

DAM.

Atthecloseofeachmarket,theNYISOinitiatesabidevaluationprocess.TheprocessinvolvesretrievingbidsfromtheMarketInformationSystem(MIS),analyzingthebidsaccordingto

,

requirementsare

met,

and

posting

results

to

the

MIS.

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InstalledCapacity

LMBPEnergyandBilateralTransactions

ransm ss on ongest on ontracts

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InstalledCapacityTheInstalledCapacity(ICAP)Marketisestablishedtoensurethatthereissufficient eneration ca acit to cover the ca acit re uirements determined b the NYISO. AnICAPresourceisageneratororloadfacilitythatisaccessibletotheNYStransmissionsystem,whichiscapableofsupplyingand/orreducingthedemandintheNYCAandcomplieswiththe

requirementsof

the

reliability

rules.

ofLBMP.Theprincipleofefficienteconomicoperationsuggeststhat,intheabsenceofanytransmissionlossesandtransmissionconstraints,theleastcostlywayofproducingelectricenergyisachievedwhenallgeneratorssupplyenergyataMWlevelsuchthatthepriceofonemoreMWofoutputisthesameforallunconstrainedunits.ThepriceofproducingthisadditionalMWis

calledthe

marginal

price.

For

the

assumed

conditions,

the

marginal

price

will

be

the

same

for

all

generatorsandloads.Thisidealoperatingconditionisknownasequallambdadispatch.

AncillaryServicesAncillaryservicessupportthetransmissionofenergyandreactivepowerfromsupplyresourcestoloadsandareusedtomaintaintheoperationalreliabilityoftheNYSpowers stem.Mores ecificall ancillar servicesrefertoservices rovidedb enerators demandsideresources,othersystemequipment,andservicesprovidedbyNYISO.OneoftheNYISOsmainresponsibilities

is

to

facilitate

the

ancillary

services

market.

NYISO

coordinates,

controls,

and,

if

necessary,directstheactionsofgenerationresourcesandotherfacilitiesthatprovideancillaryservicestotheNYISO

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T i i d C i


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TransmissionandCongestion

Contracts NYISOisresponsibleformanagingcongestion(transmissionlimitations)in

. ,commitmentscheduleisproducedthattakesintoaccountlineand

interfaceconstraints

of

the

transmission

system.

Toavoidoverloadingcertainlinesandequipment,theNYISOmayneedtodeviatefromitsleastexpensive(bidprice)generatingresourcesandredispatchtoensurethatnoconstraintsareviolated.Thismeansthatthecostofenergywillbehigherinsomelocationsandlowerinothers,

resultingin

a

locational difference

in

costs

to

LSEs

and

revenue

to

suppliers.Asmorebiddersvieforexistingtransmissioncapacityacrosskeyinterfaces,thevalueofthattransmissioncapacitytendstoincrease.

Tomanagecongestionandbringpricepredictabilitytomarketcosts,afinancialinstrument aTransmissionCon estionContract TCC was

created.

TCCs

provide

a

way

for

Market

Participants

to

pay

a

fixed

charge

fortransmission

service

ahead

of

time,

thereby

hedging

their

exposure

to

transmissioncongestion.

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A ill S i V l d


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AncillaryServicesValued

source

AGC(automatedgenerationcontrol

EmergencyDeman Response

ReactivePowerandVoltageControlService

(VAR=volt

ampere

reactive)

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Deregulationa

significant

transformation

from

Movementtowardcustomerempowermentan in ormation

ISOsplayacriticaleconomicandreliability

role

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Documents

Lecture2-Ratemaking and Policies