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Free-market think tank offers FERC's new leadership policy guidance

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Free-market think tank offers FERC's new leadership policy guidance

The R Street Institute sent a letter to the Federal Energy Regulatory Commission offering "procedural and market design recommendations" for consideration in light of the relatively recent appointment of four of the agency's five sitting commissioners.

FERC "has long stood for competition and political independence," the free-market think tank noted in the March 28 missive. "Markets are bipartisan. The R Street Institute hopes new commission leadership will not only strengthen, but embolden, this legacy."

In its letter, the nonprofit R Street Initiative asserted that it "has built a pragmatic, pro-market energy policy platform consistent with normative perspectives in applied economics and good governance." The organization praised FERC for rejecting the U.S. Department of Energy's plan for ensuring the resilience of the nation's bulk power system by guaranteeing full cost recovery for certain "fuel secure" generators. Calling that plan "unprecedented and profoundly anti-competitive" and maintaining that it was at odds with the findings of a DOE report, the R Street Institute applauded the commission's "tactful resilience to unanimously reject the proposal and pivot toward an agenda that enhances economic efficiency."

To that end, the letter, penned by the R Street Institute's Electricity Policy Manager Devin Hartman, stressed the importance of taking steps to improve the design of the nation's competitive energy markets in order to address the need for grid resilience and other issues.

With respect to FERC's resilience initiative, the R Street Institute said it "would greatly benefit from a robust economic framing" to determine whether the market flaws some industry stakeholders blame for the premature retirement of certain "baseload" coal-fired and nuclear generating units truly exist.

"Given the degree of political interest in the issue, we are concerned that rent-seeking interests may co-opt the resilience narrative," the letter said. "In particular, some resilience discussions in states and [regional transmission organization/independent system operator] stakeholder processes appear motivated to placate parochial interests."

If changes are needed, the R Street Initiative said they should involve providing market participants with incentives to ensure reliability rather than relying on a requirement-based regime. The think tank noted that it is co-hosting a technical workshop with the group Resources for the Future on "an economic framing of resilience with the aim of feeding into commission efforts."

Among other things, the R Street Initiative recommended that efforts be made to reduce artificial barriers to entry for "unconventional actors" and eliminate preferential policies, including some established in FERC Order 745 related to compensation that "turn demand response into an inferior substitute for generation."

"Correcting these would yield significant efficiency gains as demand response holds considerable market value, while the commission's attention is better suited to facilitating price-responsive demand in light of advances and the proliferation of smart technologies," according to the letter. "Price-responsive demand has always held large, but mostly elusive, value for well-functioning electricity markets. A concerted effort to remove barriers to price-responsive demand and explore pathways to efficient demand bidding has transformative potential."

Reducing artificial barriers to exit are similarly important, Hartman said, while also acknowledging that completely eliminating them would be difficult given market design shortcomings. But even if out-of-market reliability must-run payments are needed to address local reliability problems, prices still should reflect resource scarcity and rules governing them "should provide transparency in operation and regarding cost-of-service," the letter asserted.

Finally, among other things, Hartman urged FERC to improve its hydropower licensing process, clarify its market manipulation rules, publicly reevaluate its investigation procedures, engage in proactive federal and state outreach, and "avoid mission creep in the regional transmission organizations and independent system operators."

The letter recounted that a report issued by the R Street Institute in October 2017 found that "FERC at times is overly deferential to RTO/ISO proposals."

"Sometimes RTO/ISOs prioritize key stakeholders and political satisfaction, as well as short-term electric reliability guarantees, at the expense of market efficiency," Hartman said. "The commission would be wise to keep this implicit incentive structure in mind, especially in proceedings involving second- or nth-best solutions motivated by stakeholder compromises or a lack of trust in market incentives to drive reliable participant behavior."