Transcript Fuller Presentation 12.17.10

Whither FCM?
Restructuring Roundtable
Peter D. Fuller
December 17, 2010
FCM Reform Status
 FERC is evaluating the briefs filed in the
paper hearing. The last briefs were filed
on September 29
 FERC indicated a target for a final order by
March 1, 2011 and implementation for
FCA5 (June 2011, for delivery 2014/15)
 ISO has indicated FCA6 as earliest
implementation for many of the pending
reforms
Key Supplier Issues in FCM
 Pending at FERC Now:
 Need to completely address price distortions
from out of market entry
 Fully addressing ‘OOM’ entry from FCAs 1-3 in the
prospective application of Alternative Price Rule
 Need to make FCM locational
 Monitor all zonal interfaces all the time for potential
constraints (and avoid over-mitigation)
 Need to re-set the auction price parameter
 Floor prices in FCA1-4 have provided no market
information on the cost of new entry (“CONE”)
 Still pending the stakeholder process
 FCM product definition & ‘comparability’ of dispatchable
and non-dispatchable generation and demand resources
Sustainable Markets
 To Succeed, the Markets Need to Have:
 Clear and consistent obligations for all providers of
the product
 Reliability product definition should be technology-
neutral and fully specify both the ‘planning’ and
‘operational’ needs for reliability
 Are there in fact multiple products, a la quick-start
capability procured in LFRM?
 ramp capability, dispatchability, other?
 The economic system must be self-contained and
internally consistent
 No external subsidies
 Operational and investment decisions should be
consistent with visible market prices
Sustainable Markets (2)
 Recognize, and allow market prices to reflect,
all reliability constraints
 FCM zonal pricing should reflect marginal
resource needed to satisfy identified constraints,
including those identified through ‘reliability
review’, if needed
 Energy markets should have no ‘out-of-merit’
dispatch; marginal price to satisfy a constraint
should be visible in LMP
 Monotonically-increasing supply curve in energy
markets
 No un-priced “reliability dispatch” of demand
resources or other operator actions
When You Come to A Fork …
 Centralized Auction-based Market
 Challenges in adequately defining the product(s)
and specifying the constraints
 Challenges in avoiding out-of-market distortions
 Is new entry financeable?
 Contract-based Market
 Allocate responsibility for the reliability product to
LDCs or others on behalf of end-use customers
 Contract-based system for assembling portfolios of
new and existing resources to meet reliability
obligations
 LDCs, states, etc could address their own policy goals
in their approach to the portfolio, provided it meets
the reliability product needs of ISO-NE
Where Does the Future Lie?
 Recent capacity resource additions are overwhelmingly
contract-based, not market-based
 Current market price outlooks are not sufficient to support
investments to renew the aging fleet or to achieve state
and regional environmental and other policy objectives
 FCM may be incapable of supporting investment due to the
short tenor of the guaranteed price, plus heightened
regulatory uncertainty
 Long-term contracts for renewables and repowering with
efficient new combined cycle plants will advance the
regional goals of lower emissions, lower cost, enhanced
reliability and regional energy independence*
 Can contracts co-exist with FCM? Do we need to look at a
contract-based capacity mechanism?
*
See, New England Governors’ Renewable Energy Blueprint, September 15, 2009