Lecture2-Ratemaking and Policies
Transcript of 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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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
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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
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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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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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