Electric Resource Adequacy Considering Other Critical Success Factors

Electric Resource Adequacy – Considering “Other” Critical Success Factors besides Capacity Market Design Susan Tierney – Presentation to Massachusetts Restructuring Roundtable March 18, 2005 BOSTON DALLAS DENVER LOS ANGELES MENLO PARK MONTREAL NEW YORK SAN FRANCISCO WASHINGTON

Context for my remarks n Paul Joskow, MIT – resource adequacy from economist’s point of view n Dave La. Plante, ISO-NE – resource adequacy from NE’s point of view n My remarks – critical success factors for assuring resource adequacy n Next panel – LICAP: Promises and Potential Pitfalls – Stoft, Daly (NStar), Corneli (NRG), Austin (Maine) 2

“Critical Success Factors” for Resource Adequacy What factors are necessary for its success? n Entry issues – siting the infrastructure n The demand side – activating this market n State preferences – aligning them with markets n Federal/state tensions – keeping them at bay n Market monitoring – enabling markets, curbing abuses 3

Ease of entry: G & T Planning and Siting Can “required” capacity get needed approvals? n State reviews of facility proposals: n Tensions over markets versus administrative analyses in determining “need”? n Valuing out-of-state needs in state reviews? n Aligning siting reviews with signals set by other policies and processes (e. g. , LICAP, RTEP, RFP)? n Using “need” analysis to constrain entry? n Tussles over federal preemption and states rights? n Convergence of gas facility projects with electric market requirements and siting tensions? 4

The Demand Side: Activating this market Capacity markets (bilateral, spot) work best with a viable demand side: n Demand supplies are both needed: n n n Non-vertical demand curve (e. g. , willingness to pay) Capacity on call (e. g. , load shedding for pay) Critical success factors for enabling demand markets: n n n Comparable compensation for comparable resources? Bilateral (e. g. , contractual) and spot market resources? Impact of “free calls” on demand-side capacity (except in dire emergencies)? 5

State resource preferences – Aligning with regional markets Policy directives for resource “preferences” n Various state policies/preferences affect resource decisions and portfolios, e. g. , n n n n n Procurement procurements (e. g. , forward contracts) Content requirements (e. g. , RPS) Emissions markets (e. g. , carbon (RGGI)) Ownership requirements (e. g. , divestiture, no build) Moratoria (e. g. , underwater T, wind, LNG) Retail pricing and metering policies (e. g. , time of use) Reliability standards (e. g. , < or > reg’l MW standard) “least-cost” reviews (e. g. , all resource comparisons) Consider whether and how best to align design/ administration of such policies with resource adequacy approaches 6

Federal/states tensions on policy – keeping tensions at bay Traditional state role in utility cost-recovery n Reviewing utility’s power purchases/ investments to determine what/how to include in retail rates: n n n Prudent, used and useful investments (G and T). Prudent power purchases, demand-side and DG actions Recent federal/state tensions – example: n n Who has rights to transmission capacity embedded in retail rates? Who decides whether an asset should or may be acquired by a utility (e. g. , FERC’s “safety net” concerns (Cinergy)), or whether to approve affiliate transactions arising from statesupervised utility actions (e, g. , Allegheny) What actions (e. g. , change in resource status) triggers FERC reporting by holders of market-based wholesale rate authority? Implications of NARUC resolution on resource adequacy, FERC and the states? 7

Marketing monitoring: Enabling markets, curbing abuses The structure of market design (including capacity markets) intersects with MM/M n If capacity markets are properly structured, there may be less need for certain types of MM/M measures, and vice versa. n Types of structural market design elements that can affect MM/M n n n Forward contracting amounts, requirements Design of any mechanism for true-ing up revenues in capacity market Viability of the demand response function 8

Summary thoughts Resource Adequacy Policy is more than just the RTO’s Capacity Mechanism n Resource adequacy costs are long-standing element of provision of retail service (included in rates) n While RTO policy is critical element in assuring adequate resources, so are other factors: n n n Allowing timely infrastructure siting focused on env’l and site-specific issues Ensuring an active demand-side market Aligning any state policy preferences with markets Keeping federal/state relationships constructive Aligning market monitoring with market structure 9

Susan F. Tierney, Ph. D. Managing Principal Analysis Group, Inc. 111 Huntington Ave. , 10 th Floor Boston, MA 02199 ph: 617 -425 -8114 fax: 617 -425 -8001 stierney@analysisgroup. com www. analysisgroup. com 10