Week Ending May 4, 2018

Powelson Touts Gas Market Benefits, Sees Concern on RTO Governance

This Article Appears as Published in Foster Report No 3197
Powelson Touts Gas Market Benefits, Sees Concern on RTO Governance

FERC Commissioner Robert Powelson on May 2 highlighted the benefits of competitive energy markets, criticized efforts at the state and federal level to “pick winners and losers” and expressed concern with the stakeholder process and governance of independent system operators (ISOs) and regional transmission organizations (RTOs).

Powelson also touched on power grid reliability concerns heading toward summer, with power supply reserve margins in Texas below 10% and natural gas pipeline constraints in New England that were exposed during the “bomb cyclone” storm this past winter.

A former state regulator from Pennsylvania, Powelson touted natural gas market benefits to consumers from production in the Marcellus and Utica Shale areas, where day-ahead natural gas prices at the Leidy Hub in northeast Pennsylvania have been as low as $1.21/MMBtu over the past year. That represents a discount of more than $1/MMBtu below Henry Hub prices in the Gulf Coast. The development has led to lower power costs from natural gas-fired power plants and a 70% reduction in natural gas purchasing costs for local distribution companies in Pennsylvania, he said.

But less than 200 miles from the Leidy Hub, 15 million consumers in New England are paying much higher gas costs and burning fuel oil at power plants due to pipeline capacity constraints. “Houston, we have a problem, and that problem was made more prevalent” during the winter storm when New England generators burned more than 2 million gallons of fuel oil to keep the lights on in the region, Powelson said.

He referred to figures from the 2017 State of the Markets report from FERC staff, showing that of the 763 miles of natural gas pipeline added during 2017, less than 10 miles were added to increase deliveries in New England. So, while manufacturers and consumers in Ohio and Pennsylvania have seen the benefits of gas market changes, New England is relying heavily on natural gas storage and limited pipeline deliveries, which presents a grid reliability concern, Powelson said.

He spoke at a workshop on PJM Interconnection issues held by the Great Plains Institute and the Nicholas Institute for Environmental Policy at Duke University.

Referring to reports challenging the fuel security of gas-fired power plants, Powelson said PJM has plants being built at production wellheads in the Marcellus Shale.

In its pricing reform effort that is pending at FERC, PJM is trying to capture the costs and benefits of resources in the market and have them reflected in market clearing prices, said Adam Keech, executive director of market operations at PJM.

As an RTO spanning all or parts of 13 states and the District of Columbia, PJM market developments will have important implications for the U.S., added Doug Scott, vice president for strategic initiatives at the Great Plains Institute and a former chairman at the Illinois Commerce Commission. State and local issues within PJM are seeing more attention, said Scott.

States have adopted renewable portfolio standards and other measures to address issues specific to their policy preferences, and FERC is equipped to work with state regulatory colleagues, Powelson told the group. But he said some of the market constructs at ISOs are getting extremely complicated, and “there seems to be an undercurrent from state regulators to want to push back on some of these changes.”

Without stating preferences for specific generation fuels at the state level, Powelson said regulators are “sliding down a slippery slope” to put their thumb on the scale and tip markets to favor certain resources. When regulators try to pick winners and losers in the market there are bad outcomes for consumers. And when FERC is faced with a “jump ball” on wholesale market tweaks, such as the PJM pricing reform, “it puts us in an awkward situation” and that can erode confidence in ISO and RTO markets.

During his speech, he said state officials and others are losing confidence in the stakeholder process at RTOs, and “that’s something that I think we’re going to have a conversation about at the FERC.”

He elaborated on that with reporters afterward. Consumer advocates and commissioners are concerned that their voices are not being heard in the RTO stakeholder process, and grid operators need to do a better job with outreach to state officials, Powelson said. He recognized that competing interests within the stakeholder process makes it hard to build consensus on market reforms.

Beyond the stakeholder process, however, Powelson said there could be governance issues to address such as retirement succession plans among RTO board members and bylaws on diversity for board members. Such issues make sense for FERC to examine as a regulator overseeing the RTOs and making sure the grid operators “synchronize with what’s going on in the corporate world,” he said.

The slippery slope of picking winners and losers is not limited to the state level, however, as Powelson referred to the Department of Energy’s attempt to support coal and nuclear resources in organized markets that was halted by FERC and recent efforts to use the Defense Production Act of 1950 to prevent the retirement of coal and nuclear units to protect power grid resiliency. Sen. Joe Manchin (D-W.Va.) sent an April 18 letter to the White House urging the Trump administration to employ the seldom-used law to nationalize private industry to protect energy production and infrastructure critical to national defense and sovereignty.

While speaking with reporters, Powelson, a Republican, said he has no knowledge of where the Trump administration may go with the proposal. He clearly opposes the idea, saying “it would lead to the unwinding of competitive markets in this country and would create probably the greatest federal moral hazard we’ve seen in years.”

By focusing on economics and the principles of competitive markets at the wholesale level, FERC can stay away from harming markets with policy actions to support uneconomic resources, Powelson said during his speech. “I’m proud to say that competition policy is alive and well at the FERC,” with market developments such as more renewable resources being added at lower costs, greenhouse gas emission reductions and energy storage resources expected to reach 50 GW by 2030.

The GHG emission reductions stem from retirement of coal-fired power plants and additions of newer, more efficient facilities that include solar, wind and gas-fired facilities. Of the 32,000 MW of plants to retire between 2011 and 2020, 77% are coal-fired units with an average age of 54 years, he said. Within competitive power markets “old, inefficient plants need to retire” because regulators do not want markets to send incorrect price signals to businesses entering and exiting the markets, Powelson said.

By Tom Tiernan TTiernan@fosterreport.com

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