The Federal Energy Regulatory Commission needs to do more to evaluate the performance of electricity capacity markets and the risks they face, and then to use that information to pursue any needed changes, according to the U.S. Government Accountability Office.
A 2016 energy and water development appropriations bill directed the GAO to review the use of capacity markets in the United States. The results of that study were detailed in a recent report, "Four Regions Use Capacity Markets to Help Ensure Adequate Resources, but FERC Has Not Fully Assessed Their Performance."
The wide-ranging study took place between March 2016 and December 2017 and focused on the capacity markets operated by the ISO New England, Midcontinent ISO, New York ISO and PJM Interconnection. The problem, according to the report, is that the GAO found data needed to assess the performance of those capacity markets lacking.
The GAO said one reason the data is insufficient is that FERC has failed to promote consistency where possible, such as by establishing definitions for key terms and metrics. Instead, FERC accepts data however they are provided by the grid operators as well as by electricity suppliers operating outside the organized capacity markets. Moreover, the commission does not validate the data, the report noted.
"Without taking sufficient steps to improve the quality of data, there continues to be a risk that errors, missing data, and inconsistent reporting of data will reduce the quality of reports published by FERC, a source of data that could be used to better understand capacity market performance," the GAO said.
The GAO also faulted FERC for never assessing overall capacity market performance or responding to risks to achieving capacity markets' objectives. The agency instead has relied on the capacity market operators and their independent market monitors to collect and disseminate information and to pursue needed improvements through their stakeholder processes.
According to the report, FERC officials told the GAO that cross-comparisons of capacity markets are complicated by regional differences, including in the mix of power plants and other resources and state policies, and that drawing conclusions about how a region would have performed in the absence of capacity markets is very difficult. In addition, agency officials said they consider the performance of capacity markets when they review proposed changes to individual capacity market rules.
"A focus on examining individual proposals to change capacity market rules does not provide comprehensive insight into how capacity markets as a whole are performing and whether they have produced desired results," the report maintained. "By developing performance goals and measuring progress toward meeting them, as well as using performance information to make changes as needed, FERC would have a framework for proactively, regularly, and more fully identifying and addressing potential performance problems and identifying and sharing information about effective resource adequacy approaches among RTOs and grid operators."
The GAO further maintained that addressing performance problems and sharing effective approaches may help ensure customers do not pay more for resource adequacy than they need to.
While FERC has taken certain steps to address capacity market deficiencies in certain regions, the GAO said those actions have not been enough, and the risks to those markets have persisted and are growing. The report also said the capacity markets in the four regional transmission organizations "have led to $51 billion in costs from 2013 to 2016." But "after almost a decade of operation in some RTOs, stakeholders continue to raise questions about the performance of capacity markets. Furthermore, while there are four unique capacity markets in operation, FERC has not fully assessed how well the capacity markets have performed individually or overall relative to their objective of ensuring adequate resources at just and reasonable prices."
The report therefore said FERC needs to take steps to improve the quality of the data it collects and publishes by, for instance, implementing improved data quality checks and standardizing definitions. The GAO further recommended that FERC develop a framework to formally and regularly assess the overall performance of capacity markets, "such as by establishing performance goals, measuring the progress of individual capacity markets against these goals, and using performance information to identify needed changes." Finally, the report said FERC "should develop and document an approach to regularly identify, assess, and respond to risks that capacity markets face."
After reviewing a draft of the report, FERC said it generally agreed with the findings and found the recommendations "to be constructive," the GAO said. FERC accordingly pledged to direct its staff to develop appropriate next steps to implement the GAO's recommendations.
