Uncovering Wholesale Electricity Market Principles

Abstract

This paper examines, enunciates, and makes explicit a set of market principles historically relied upon by the Federal Energy Regulatory Commission (FERC) to regulate wholesale electricity markets as required under the Federal Power Act (FPA). These identified competitive market principles are supported by policy and legal foundations that run through a myriad of FERC orders and court decisions. This paper seeks to make that history and those implicit market principles explicit by distilling and organizing Commission Orders and court decisions. It concludes that five market principles, each with multiple subprinciples, can be identified as elemental to how FERC understands and implements its statutory authority. Clear articulation of these foundational principles should help guide engaged entities as wholesale power markets continue to evolve. Market Principle 1 states that wholesale market revenues should predominantly flow from well-designed energy and ancillary services markets. Market structures generally are found to be preferable to non-market structures. Moreover, energy and ancillary services markets, in relationship to wholesale capacity markets, are better able to efficiently promote a least-cost resource. Market Principle 2 states that when altering market design, FERC and Independent System Operators (ISOs) should focus on only those services that are clearly needed, and ensure that any market design change does not unduly discriminate between resources. Market design changes focused on technology-neutral and well-defined granular services will help ensure that the design change does not lead to undue discrimination or preference that effectively favors certain resources. When such an impact still occurs, strong evidence showing that the rules are not unreasonable and arbitrary and that no non-unduly discriminatory and preferential alternative exists must support the change. Market Principle 3 states that interventions that distort transparent and accurate pricing should be minimized. Out-of-market interventions, in particular, have the potential to distort price signals and undermine competition. Market Principle 4 states that FERC’s just and reasonable standard strongly favors rate decreasing outcomes. Markets are premised on the economic presumption that competition reduces prices, in furtherance of the just and reasonable standard. Market Principle 5 states that FERC and ISOs should facilitate and not undermine state public policy preferences. FERC and ISOs are not well-situated to serve as decision-makers in determining which state public policy preferences should be given effect. State public policy preferences that do not run afoul of FERC’s authority under the FPA should thus be given full effect.