The Resource Adequacy Requirement in FERC's Standard Market Design: Help for Competition or a Return to Command and Control?

Abstract

Although electricity markets' march toward competition has not been a complete success, the Federal Energy Regulatory Commission ("FERC") remains committed to easing wholesale electricity markets toward that goal. Indeed, FERC's Standard Market Design Notice of Proposed Rulemaking makes some headway: Locational marginal pricing, for example, will force load to internalize the congestion costs of its consumption and will signal the need for new transmission and generation. FERC, however, has embraced price caps in spot markets and, to make the markets work despite the price caps, has proposed a Resource Adequacy Requirement ("RAR ") to ensure that adequate generation exists to deliver electricity to load. If RAR achieves FERC's objective, it will stunt the growth of demand response, a necessary component of stable competition. Further, RAR will permit the perpetuation of the current price-cap regime, which distorts price signals. The claim that RAR together with price caps are only temporary measures to help put wholesale markets on surer footing seems misguided; until price caps are raised significantly above present levels, load-serving entities and load itself lack the incentive to invest in technologies necessary to make demand response a reality. If this were not enough to counsel against promulgating the PAR, the proposal is internally contradictory and, according to the relevant statutes, lies outside FERC's jurisdiction to implement or enforce. FERC should discard the RAR and current price caps and instead adopt a reformist program that will better allow scarcity spot prices to ensure generation adequacy.