The following are notable excerpts from comments filed by Direct Energy Business regarding price formation in FERC-jurisdictional RTOs. Direct Energy's comments were the only we've seen filed by a pure-play retail supplier:

"The level of the price-based offer cap should not be kept artificially low by an offer cap. When there is no market power, offer-caps for priced based offers are not necessary since competition disciplines offers. The best control against inflated offers is a competitive market. We recognize that it may take time to transition to a higher or even no price cap energy market because of concerns of market power; thus, it is especially critical that market oversight is vigilant in ensuring that offers do not reflect market power or lead to non-competitive market results. "

"In RTO operations, transparency is of utmost importance to ensure competitive markets. Prices need to reflect system conditions and market participants need to understand the price consequences of actions being taken by the RTO. This will enable market participants to properly price hedges and incent appropriate responses such as building more generation and transmission or providing more demand response. As a load serving entity, Direct Energy serves a vital function in competitive retail markets by hedging end-use customer load as cost efficiently as possible. Operational interference with price formation (i) undermines the ability to hedge effectively, and (ii) frequently creates unhedgeable risk through uplift. In either case, the consumers are negatively impacted by paying for uplift and/or not receiving as efficient a price as they otherwise would. "

"The RTO should not be in the business of controlling prices to levels that they consider reasonable through price bounding. Use of price bounding should be eliminated and where it does exist there needs to be a specific end date/time. The temporary continuance of already existing price- bounding areas is needed for an orderly transition. Many market participants have entered into bilateral contracts that often go a year into the future and some that go two or three years. Also, annual FTR positions and ARR positions have been taken with expectation of continuance of established areas of price bounding. To avoid disturbing these existing arrangements and market deals while balancing the need to move toward improved price formation, DE suggests a one year transition time to begin no sooner that the start of a delivery year (June 1st for PJM). "

"Before jumping into the creation of new ancillary services, it must be determined whether the product already exists and is being compensated. If the answer is yes, the next step would be to determine whether the compensation is just and reasonable and/or could be better produced through more competitive price signals. For example, if it is a question of having a particular piece of equipment such as a governor, the equipment may already be receiving compensation as part of a capacity payment. If however, different governors were able to respond differently if given appropriate price signals, then it would be worth exploring the creation of a stand-alone product with its own revenue stream subject to the disciplines of a competitive market. Thus while we support the FERC’s recent NOPR seeking comments as to whether it should create a market for primary frequency response, we note that it is important to consider this criteria. Additionally, genuinely new products that can be introduced with sufficient liquidity to create new markets should be encouraged. Markets are a useful means to address reliability needs, but only to the extent a liquid market can be developed. Without a level of liquidity a market is practically unhedgeable, and entities such as DE, its customers and consumers generally will simply incur additional costs with no ability to hedge them and without any mechanism to insure competitive outcomes. Direct Energy discovered first hand that where the ancillary services market is not liquid, it is impossible for load serving entities and their customers to physically hedge with generators on a bilateral basis. We have seen some ancillary services become more liquid whereby either financial or physical hedges are available, such as for the forward reserves market for ten minute non spin reserves in ISO-NE and regulation in PJM. However, overall ancillary services do not seem to lend themselves to liquid market trading. It is thus very important to determine whether there is sufficient competition to preclude the use of capped and/or cost based offers in creating such a market. It should also be noted that, like ancillary service markets, capacity markets also serve the purpose of encouraging units with flexible operations. These two markets (capacity and ancillary) should be coordinated to ensure they are working together."

See Direct's full comments

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FERC   RTOs   Prices Caps  

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