FERC's Advice: Avoid Our Deregulated ISO/RTO Spot Markets

We have previously noted FERC's refusal to scrutinize the rates set in the dysfunctional spot markets it fostered and approved for wholesale electricity trading. See No Evil: FERC Refuses to Examine Gaming of RTO/ISO Electricity Spot Markets. FERC again has rebuffed another plea to take a closer look.

Senator Barbara Mikulski of Maryland recently asked FERC to respond to the request of the Campaign for Fair Electric Rates "to undertake an investigation of whether the rates produced in these RTO-run markets meet the just and reasonable standard." Maryland has been ravaged by higher electricity prices since allowing utilities to sell their power plants (as did New York). This ended state control over prices charged for the production of energy, and created a huge dependency on power now purchased in wholesale markets, from sellers who have been allowed by FERC to sell at whatever price the market will bear.

FERC responded with a defense of its market rate regime and a suggestion:

Finally, as you are also aware, jurisdiction over electricity prices is both a federal and state/local issue. While this Commission has jurisdiction over RTOs and ISOs, participation by utilities in these markets is on a a voluntary basis. Federal regulations do not require anyone to make purchases from any RTO or ISO, including PJM. Many entities generate most of their own electricity or purchase it through long-term contracts and make only limited purchases through RTO or ISO spot markets. And, while these organized wholesale markets are subject to this Commission's jurisdiction, state and local regulators have jurisdiction over retail distributor procurement policies. Those policies affect the prices that utility retail customers pay.

FERC's glib remedy for those unhappy with ISO/RTO spot market prices is simple: states can tell their utilities to stop buying at the RTO/ISO spot market convenience stores and make more long-term purchases. It is consistent with what FERC said some years ago, during the California spot market manipulation, to the effect that prudent retail utilities would arrange to buy most of the energy needed by their retail customers in long term wholesale contract arrangements, and would only buy 10% or so from the spot markets.

A 2005 report indicates that about 55% of the energy in New York is purchased in the NYISO spot markets. It is possible that much of the power sold under bilateral long term contracts has price adjustment factors which link the contract price to the spot market prices.

It is not responsible for FERC just to say buyers should purchase elsewhere. Sellers with "market-based rates" are also allowed by FERC to set their own prices for their long term sales contracts, which FERC requires to be unfiled and refuses to review for reasonableness. Obviously, the sellers are informed by their predictions of what they will receive at the ISO/RTO spot markets, and so they will tend to raise their long term rates accordingly. Some long term contracts are indexed to electricity spot market prices with a premium added.

It is also not a satisfactory answer for FERC to rely on states or local utilities to discipline the high rates of wholesale sellers by threatening to buy electricity in other markets -- from the same sellers functionally deregulated by FERC. FERC cannot avoid or subdelegate its statutory duties under the Federal Power Act, which establishes a filed rate regulation system with rates actively overseen by FERC.

Relying on local distribution utilities to buy wisely and benefit their customers has not worked. If, as in New York, the retail utilities are allowed by state regulators to pass through all wholesale purchased power costs, they will have little incentive to fight high ISO/RTO prices and market power on behalf of their consumers. Also, if they have holding company energy trading affiliates, for example, Con Edison Energy and Con Edison Solutions, whose business plans rely on the RTO/ISO spot market system, the local utilities may not wish to change the status quo.

FERC is simply trying to evade its duties under the Federal Power Act, which requires all rates demanded and charged to be just and reasonable. That includes all rates set at the ISO/RTO.
As the Supreme Court has stated, "the prevailing price in the marketplace cannot be the final measure of "just and reasonable" rates mandated by the Act **** the Act makes unlawful all rates which are not just and reasonable, and does not say a little unlawfulness is permitted. " FPC v Texaco, 417 U.S. 380 (1974).

As a matter of law, it is not an acceptable solution for FERC to do nothing to correct the RTO/ISO rates and tell the public, states, and local utilities to make their own power or buy it elsewhere. See Supreme Court Leaves Fundamental Questions About FERC Market Rate Scheme Unanswered. Under the circumstances, however, it may not be a bad idea to secure more energy from sources less affected by the spot markets.