EEIICF Transmission and Wholesale Markets School

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EEI/ICF Transmission and Wholesale Markets School

• Doug Nazarian
• Maryland Public Service Commission
• July 1, 2009

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Transmission Policies and Regulation

• The Maryland Example
• Generation and supply
• Transmission
• Demand-side resources
• Integrated Resource Planning (IRP)
• IRP before v. after restructuring
• Real world complexities of post-restructuring IRP

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The Maryland Example

• Generation and Supply
• Historically, utilities were integrated
  vertically generation and transmission and
  distribution systems all were owned and operated
  by utilities and regulated under cost-of-service
  principles
• In 1999, Maryland restructured utilities no
  longer own and operate generation, but only their
  transmission and distribution systems
• Affiliates can own generation, but are not
  regulated
• New generation facilities still need a
  Certificate of Public Convenience and Necessity

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The Maryland Example

• Generation and Supply
• Since restructuring, the Commission no longer
  regulates existing generation directly
• New generation could be built and owned by
  utilities and regulated, but the law contemplates
  that merchant plants will be the norm
• Maryland utilities buy Standard Offer Service
  (SOS) electricity from wholesale suppliers
  through Commission-supervised auctions
• Auctions for residential and small commercial SOS
  are held every six months for two-year contracts
  covering 25 of the load, priced twice per year
  (summer and winter)
• Auctions for large commercial SOS are held every
  three months for three-month contracts covering
  100 of the load, priced every three months
• Ratepayers can select alternative suppliers.
  Many commercial/industrial customers buy from
  alternative suppliers, few residential customers
  do
• The Maryland SOS procurement process is under
  review

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The Maryland Example

• Generation and Supply
• The Commission exerts indirect influence through
  advocacy at PJM and FERC
• The Commission has participated in negotiations
  regarding market rules and structure and has
  litigated disputes over market power rules and
  rules governing PJMs capacity markets
• The Commission works closely with the PJM
  Independent Market Monitor
• The Commission works closely with other states
  through the Organization of PJM States

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The Maryland Example

• Transmission
• PJM performs regional transmission planning
• PJM focuses on reliability, not economic impact
  projects and timing are all about reliability
  violations, not rates
• Cost recovery for bigger lines (230 kV and
  higher) is determined/regulated by FERC, charged
  to utilities and passed through to customers via
  distribution rates
• The Commission participates as a party in FERC
  transmission cost recovery proceedings and has
  challenged rulings establishing rates of return
• The Commission regulates Maryland utilities
  transmission and distribution systems under
  cost-of-service principles
• Planning and construction decisions follow the
  same process as before restructuring

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The Maryland Example

• Transmission
• The American Recovery and Reinvestment Act of
  2009 (ARRA) will fund new national transmission
  planning
• The ARRA will fund separate analyses for the
  Eastern Interconnection, Western Interconnection
  and ERCOT
• The process raises, and will allow analysis of,
  interesting policy questions Renewables? On
  land or off-shore? What to build and where to
  site it? Build transmission first or generation?
• The ARRA funding mandates a leadership role for
  States in the new planning process

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The Maryland Example

• The Commission has siting authority over
  generating stations and transmission projects
  within Maryland
• The statute governing Certificates of Public
  Convenience and Necessity (CPCN) requires the
  Commission to consider
• the recommendation of the governing body of each
  county or municipal corporation in which any
  portion of the construction of the transmission
  line is proposed to be located
• (i) the stability and reliability of the
  electric system (ii) economics (iii) esthetics
  (iv) historic sites (v) aviation safety (vi)
  when applicable, air and water pollution and
  (vii) the availability of means for the timely
  disposal of wastes produced by any generating
  station.
• For transmission projects, the need to meet
  existing and future demand for electric service
  no need requirement for generation stations
• Under restructuring, need for new generation is
  determined by the marketplace
• The CPCN process is a one-stop shop that
  encompasses all state and local authorizations
  for the plant or line
• Smaller generation projects (under 70 megawatts,
  especially wind) are exempt from the CPCN
  requirement, but have to obtain all State and
  local permits

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The Maryland Example

• Demand-side resources
• These include demand response and distributed
  generation, energy efficiency and conservation
  programs
• Utility programs must be approved by Commission
• Utilities typically recover costs through a
  distribution surcharge
• Demand-side resources qualify as capacity
  resources in the PJM capacity market, which
  offsets ratepayer costs

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Integrated Resource Planning

• Before restructuring
• Utilities submitted integrated resource plans
• The Commission decided what to build and when
• Generation and transmission facilities were part
  of the utilities rate base
• After restructuring
• No formal IRP
• Transmission planning handled by PJM
• Market forces are to set electricity prices and
  drive whether, when and where new resources are
  needed

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Integrated Resource Planning

• Real world complexities
• Will the marketplace deliver?
• Rates matter and blackouts are not an option
• Even without planning authority or regulatory
  control, the Commission is expected to keep the
  lights on and the rates low
• Wholesale/capacity market assumptions may not
  track reality, e.g., TrAIL line assumptions in
  2011-12 RPM auction created serious concerns
  about a shortfall and no market mechanism was
  available to address it
• Wholesale market rules can drive pricing
• 2012-13 RPM auction clearing prices went up in
  most of Maryland because of a rule change, even
  though supply/demand mix had improved
• The Commission has the authority to intervene in
  the supply/demand mix when appropriate, even
  without planning authority
• Maryland law sends conflicting signals rely on
  competition and market forces, but direct new
  resources in order to meet long-term,
  anticipated demand
• The Commission has intervened once, ordering
  400MW of additional demand response to ensure
  reliability (the Gap RFP), and will consider
  ordering additional resources for reliability,
  economic benefits or both

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Integrated Resource Planning

• Real world complexities
• Public and political influences
• Dissatisfaction with the operation of wholesale
  markets and with retail rates has led to an
  ongoing debate over re-regulation in Maryland
• Prices have gone up, but reliability has been in
  question
• Capacity charges represent a growing portion of
  wholesale prices, but not delivered resources
• 2012-13 RPM auction high clearing prices in
  most of Maryland are still below the net Cost of
  New Entry, thus higher prices will yield no new
  resources
• Proposed generation projects are not getting
  financed or built, and some argue long-term
  contracts are necessary
• Residential consumers in Maryland generally have
  not chosen alternative suppliers
• Policy decisions can accelerate developments the
  market might not deliver on its own
• Maryland examples include environmental
  standards, renewable portfolio standards,
  Regional Greenhouse Gas Initiative (cap-and-trade
  program), EmPower Maryland Act (energy efficiency
  and demand response targets)
• These initiatives may accomplish important goals,
  but can influence the supply/demand mix and rates

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For more information

• Public Service Commission
• 6 St. Paul Street, 16th Floor
• Baltimore, MD 21202
• 410-767-8000
• www.psc.state.md.us