Save the Dates: NEM's Summer Executive Committee and Policy Development Meeting will be held July 9-10, 2007, in Chicago, Illinois. More details coming soon.

FERC convened its second technical conference on wholesale power markets this week. The conference was focused on organized markets. Three panels were convened to discuss demand response, long-term power contracting, and RTO/ISO responsiveness. Chairman Kelliher began the meeting by noting his expectation that, "at the end of this process the Commission will propose a number of significant policy reforms." The full text of Chairman Kelliher's Opening Remarks is available on the NEM Website.

The first panel focused on demand response. Commissioner Lieberman of Illinois discussed a successful real time pricing pilot in his state for residential customers and recent legislation that was passed to expand its availability. Lieberman noted the need for consumer education about pricing and questioned how it is possible to get to a competitive market without price responsive demand. ISONE and MISO discussed their demand response initiatives but noted that the disconnect between wholesale and retail markets poses a problem. For instance, average retail ratemaking mutes the price signals that consumers see, and therefore consumers do not realize the benefit of demand reduction. Professor Hogan argued for the need for improved pricing signals to support demand response. Hogan stated that, "better scarcity pricing implemented through the operating demand curve would provide an important signal and incentive for flexible demand participation in spot markets." Consumers and demand aggregators called for market improvements to support demand response such as permitting direct market involvement for these resources, integrating demand resources into market clearing price mechanisms and RTO tariffs, eliminating biases in favor of generation in NERC standards, improved metering, and minimizing costs of participation at the RTO level.

Commissioner Wellinghoff queried whether it would be helpful if FERC made a determination that wholesale markets will not be truly competitive without demand response. Wellinghoff questioned the advisability of implementing scarcity pricing in wholesale markets before retail customers have the ability to respond. Commissioner Kelly said she had three "take aways" from the panel: 1) it is not a question of whether we integrate demand response, but of how and when we integrate demand response; 2) we should implement demand response now (no reasons were offered to delay in her opinion); and 3) it appears that ISONE has done it, at least at a first cut level. Kelly urged that demand response producers need to tell FERC what rules are needed in order to get their product deployed. Chairman Kelliher wanted to explore what the disconnects are between federal and state policy (he suggested scarcity pricing, lack of real time pricing, lack of advanced metering) and what FERC can do within its authority to remedy them.

The second panel focused on long term contracting. PJM, Goldman Sachs and Constellation discussed some of the impediments to long term contracting such as the likelihood of carbon legislation, regulatory uncertainty, likelihood of environmental legislation, retail rate freezes and deferrals, issues concerning the sanctity of contracts and siting issues. Capacity markets create more opportunities for generation. Large customers (Alcoa and Blue Ridge Power Agency) discussed the difficulties they had in obtaining long term contracts.

Chairman Kelliher noted that buyer and seller interest in long term contracts is likely to wax and wane over time, and we happen to be in an environment of particularly high risk for generation to enter into long term contracts. Commissioner Kelly asked whether the primary unhedgeable risk is environmental (i.e. possible legislation and its impacts). Kelly concluded that definitively setting a national environmental carbon policy would be helpful.

The third panel discussed RTO/ISO responsiveness. Chairman Kelliher raised a number of issues on this subject such as legal limits to FERC's ability to affect the RTO/ISO governance issue, preventing the RTO board from being dependent on management, keeping a non-profit entity accountable for its costs, limiting the board size to keep it manageable, and the pros/cons of stakeholder versus independent versus hybrid boards. Commissioner Kelly noted that more communication between LSEs/customers and the Board were necessary. Commissioner Moeller suggested that a "hybrid hybrid" board could be appropriate, i.e., a board that can relate to the issues in the market and yet is not so interested as to have conflicted positions.

Calpine Energy Services (CES) was assessed a $4.5 million civil penalty for self-reported violations of the shipper must have title rule. The violations were discovered by CES in the course of internal contract review in connection with its bankruptcy. "CES violated the 'shipper must have title' requirement by transporting gas to which it held title using capacity rights of other Calpine affiliates. CES' violations involve a large number of transactions representing approximately 156.5 Bcf of natural gas, and occurring over a period of years dating back to at least January 2003." The Commission identified seven factors as being significant in its determination: 1) the shipper must have title requirement is longstanding Commission rule; 2) the number and duration of violations; 3) failure of senior management to ensure compliance with the shipper must have title rule; 4) CES' prompt self-reporting to FERC; 5) CES cooperation with FERC's investigation; 6) CES' prompt corrective actions taken to ensure compliance; and 7) lack of identifiable financial harm to third parties. The full text of the Order is available on the NEM Website.