compete market principles

8/13/2019 COMPETE Market Principles

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Competitive electricity markets

continue to demonstrate their

substantial value to customers

through lower prices, increased efficiencies

and service innovations that allow customers

to more effectively manage their energy

portfolios. In competitive markets,

customers benefit from the flexibility tochoose from a variety of technologies,

products and services offered by competing

providers.

Market Principles

The success of retail electricity markets is inextricably linked to the efficacy of wholesale

markets, and vice versa. A broad regional wholesale market that provides a level playing

field for all resources as well as accurate, timely and transparent prices is essential for the

supply choices and innovative services that drive competition for retail customers. And

because retail providers shop in the wholesale market, the pressure on retail providers

to keep costs down and innovate further sharpens the need for the wholesale markets to

operate as efficiently as possible.

Despite the proven customer benefits of well-structured electricity markets, significant

policy challenges threaten their long-term sustainability. These challenges include

government subsidized and rate-based generation in competitive markets, preferential

treatment of some resources, non-bypassable retail charges to recover the generation-

related costs of certain resources, and resources procured without using a competitive

market process.

Based on the substantial value of electricity markets to customers, COMPETE will

continue to promote and defend competitive electricity markets and to vigorously

oppose policies that threaten the sustainability of existing markets. To provide clarity

and guidance to those endeavors, the following principles will be reflected in all of

COMPETEs positions and activities.


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Price Signals

Prices should reflect market fundamentals, accountfor the location of transmission network bottlenecks,

and be available to market participants as close to real

time as possible. Because of the unique characteristics

of electricity, market fundamentals can change

quickly. Accordingly, price signals are needed in

time for customers to react to them and have the

opportunity to make cost-saving adjustments. Seeing

price signals after consumption and other energy

portfolio decisions have been made, or having static

prices that are unresponsive to changes in the market,as is the case under traditional regulation, results in

inefficient usage decisions and higher energy bills for

customers.

Prices should perform certain basic functions: ensure

that the least costly generators are selected to operate,

signal how much generation is needed, provide

the tools to transparently manage price risks and

provide the basis upon which resource developers

can assess the value of investments based on marketfundamentals (supply, demand, fuel prices, etc.).

Distinct services should have distinct prices.

Electricity supply in wholesale markets is comprised

of a number of different services provided by

different generators with different operating and

cost characteristics. For example, some generators

are needed to follow the minute-to-minute variations

in demand on the system and thus must be able to

change output quickly. Pricing the various servicesseparately helps ensure that the most efficient

resources are used for each service, creating greater

reliability at the lowest possible price. End use

customers could elect to respond to prices by reducing

demand or installing on-site generation.

Electricity

markets must

have accurate

and transparentprice signals

to guide

investment and

consumption

decisions.

America:

Powered by Competition


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Open Markets

There must be no arbitrary limits on which entities,resources or customers may participate in wholesale

or retail markets. Examples of arbitrary restrictions

are the percentage limitations imposed in some states

on how much load is subject to retail competition

(e.g., Michigan and California).

Preventing some customers from shopping for their

electricity suppliers while allowing others to shop

violates fundamental notions of fairness. Moreover,

it artificially limits the demand for service fromcompetitive suppliers, keeps investment in potentially

lowercost resources out of the market, and leads to

unnecessarily high prices.

Preventing some customers

from shopping for their

electricity suppliers while

allowing others to shop

violates fundamental

notions of fairness.

Competitive

markets must

be open to

all marketparticipants

without arbitrary

restrictions

on market

participation.

America:



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Fair Rules& Practices

Market rules and practicesmust be non-discriminatory

so that all resources

participate on a level

playing field.

A variety of resourcescan provide the services

needed to keep supply

and demand in balance,

including traditionally-

fueled generators, renewable

intermittent generators,

storage facilities such as

batteries and flywheels, and demand response. These resources have different operatingcharacteristics that must be recognized by the market rules so that all have a fair chance

to compete.

A level playing field also requires basing the market rules and practices on the principle

of comparability: all resources must abide by the same rules, must meet the same

obligations, and must be compensated for a comparable service actually provided to the

grid. Otherwise, customers are forced to subsidize the choices of a resource.

Assuring a level playing field for all resources enables customer choice, and ensures

vibrant competition, innovation and the lowest available prices for customers.

Comparability:

All resources must abide by the same rules,must meet the same obligations, and must be

compensated for a comparable service actually

provided to the grid.


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Non-bypassable surcharges

are anti-competitive,

acting as a tax on shopping

customers by forcing them

to pay twice for generation

service if they choose a

competitive supplier.

Surchargesfor Generation

Non-bypassable charges that retail

customers are forced to pay must not be

used to recover the costs of generation and

other supply services.

Some states seek to recover the costs of certain generation facilities from all customers

through a non-bypassable surcharge on distribution wires service. These charges are

anti-competitive, acting as a tax on shopping customers by forcing them to pay twice for

generation service if they choose a competitive supplier. Such charges can also saddle

customers with risk of poor generation supply decisions and practices of others, over

which the customer has no control.

Eliminating anti-competitive non-bypassable charges ensures that electricity customers

pay for service based solely on voluntary contracts with competitive suppliers.

Customers that shop for their retail energy service bear the risks of that choice, and

should not be asked to pay for services or resources they did not choose (e.g., NJ LCAPPplants).


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Subsidized Resources

Subsidized

resources distort

the market and

harm customers,

and should not be

allowed to interferein competitive

markets.

Subsidies for supply resources can

occur through various means. One way

is when a state provides a guaranteed

revenue stream to a new generator that

is not available to competing existinggenerators. Another is by limiting

procurements to a specific type of

resource. Resources are subsidized to the

extent the price paid to them exceeds the

price that would have resulted from an

unrestricted market without government

intervention. Subsidies unfairly pick

winners and losers in the supply marketand lead to above-market solutions and

higher prices for customers.

Subsidies can give the short-term

illusion of reducing market prices by

adding new supply resources. However,

subsidies must be paid by customers (or

taxpayers) and, over time, can result in

non-subsidized competitors leaving the

market, taking with them the investment

and competitive discipline needed for a

well-functioning market.

COMPETE recognizes that subsidies

currently exist for energy technologies.

Where they exist, such subsidies should

be identified for consumers and there

should be a plan in place to reduce and

eliminate the subsidy within a reasonable

time.

There must be strong protections from

buyer-side market power, such as the

Minimum Offer Pricing Rules (MOPR)

in the organized regional wholesale

markets, like PJM, to protect customersfrom the negative impacts of price

subsidies.

America:

Powered by

Competition


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CompetitiveProcurements

Utilities or states sometimes direct the procurement

of resources to meet forecasted demand. However,

eligible resources are sometimes restricted to new

resources, resources in certain locations, or resources

using certain technologies. Similar to subsidies, these

restrictions can unfairly pick winners and losers,

result in above-market solutions and uneconomic

entry. Customers ultimately pay higher prices fortheir electricity.

Requiring that competitive procurements consider all

qualifying resources achieves the greatest customer

benefit by ensuring that potentially lower-cost

resources that can perform the needed service are not

kept out of the market.

Requiring that competitive

procurements consider

all qualifying resources

achieves the greatestcustomer benefit.

Competitive

procurements

must be open

to all qualifyingresources, and

not restricted

to specific

technologies,

locations or

vintages.

America:



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Market BasedResource Adequacy

To ensure long-term resource adequacy,

electricity markets must have clear and

transparent standards that rely on market-

based mechanisms, which can include a

capacity construct where needed.

Resource adequacy is the availability of an adequate supply of generation or demand

responsive resources to support safe and reliable operation of the grid. Resource

adequacy standards provide incentives for the siting of resources for future reliability

needs, mitigate price volatility, and help assure that load serving entities maintain

adequate resources.

Resource adequacy standards should be durable and not require modifications from year

to year.

Such standards should ensure sufficient incentives and meaningful obligations for all

resources, and all resources should have equivalent obligations.

Resource Adequacy:The availability of an adequate supply of

generation or demand responsive resources to

support safe and reliable operation of the grid.


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Competitive

Wholesale Markets

RTOs and ISOs operate and manage

the interstate electricity grid over large

regions, are independent of any market

participant, and dispatch their systems

by means of competitive auction-based

energy markets. Accordingly, theseorganized markets provide the fair,

transparent rules and the access to

grid services needed for a level playing

field, and produce prices that signal

the true cost of resources needed for a

wellfunctioning competitive market.

The organized markets are the best wayto assure an affordable, efficient and

adequate supply of electricity and to meet

environmental goals. They provide the

tools that foster efficient investment and

the products and services consumers

want, provide a level playing field for all

resources, foster renewable and demand

response resources, enable innovation,

attract infrastructure investment in the

right places, and reward efficiencies.

States that have restructured retail

electricity markets but are not within

the footprint of an RTO or ISO should

establish an independent entity

to perform the critical function of

scheduling generation and transmissionservices. Independence from market

participants is essential to ensure that

such important functions are performed

in a non-discriminatory manner that

ensures a level playing field.

America:

Powered by

Competition

Independently administered organized

wholesale markets, such as those operated

by Regional Transmission Organizations

(RTOs) and Independent System Operators

(ISOs), are needed for competitiveelectricity markets.


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Effective independent

oversight provides theconfidence in results that

attracts transmission and

generation investment and

ensures customers of a

reliable supply of electricity

at the lowest available

costs.

IndependentOversight

Competitive markets must have clear and

transparent rules and effective independent

oversight to ensure compliance with the

rules and accountability to customers and

regulators.

The fair market rules needed for a level playing field and efficient operation mustbe enforced, and regularly evaluated. Effective independent oversight provides the

confidence in results that attracts transmission and generation investment and ensures

customers of a reliable supply of electricity at the lowest available costs. Accordingly,

appropriate sanctions must be imposed for violating rules to ensure that all participants

have confidence in the market. In addition, there should be periodic assessments of

market performance to ensure prices are accurate and the market is sustainable.


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Principles for Well-Functioning Competitive

Electricity Markets

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