UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION

Transcription

1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION ) Coordination Between Natural Gas ) Docket No. AD And Electricity Markets ) ) COMMENTS OF DOMINION RESOURCES SERVICES, INC. During August 2012, the Federal Energy Regulatory Commission ( Commission ) held a series of technical conferences to discuss issues related to coordination between the natural gas and electricity markets. The technical conferences provided a timely opportunity to survey the range and degree of issues faced by the various regions of the country as reliance on natural gasfired generation is steadily increasing. Dominion Resources Services, Inc. ( Dominion ), on behalf of its affiliated Public Utilities subject to the Commission s jurisdiction listed below, participated on two of the roundtable discussions and would like to thank the Commission for the opportunity to participate. Dominion believes there are a few key points to take away from the technical conference discussions and offers the following comments on these points. First, the maintenance of existing fuel diversity is an important mitigant to the risks of reliance on a single-source fuel supply. New environmental laws and regulations may cause certain unit retirements or deratings. However, the Commission and the Regional Transmission Organizations ( RTOs ) must be careful designing rules that don t cause premature retirements by suppressing price signals for reliability needs or sending price signals only to gas-fired resources. Second, in RTO regions facing gas reliance concerns, the region should favor market-based solutions over mandated solutions that could distort the market. To allow market-based solutions to arise, the

2 Commission must ensure that the basic market design for the region is working properly by sending appropriate and transparent price signals to all market participants. Only then can the Commission, the RTOs, state regulators and market participants accurately evaluate the existence of a problem and whether modifying price signals will improve the development of efficient market solutions. Finally, it is apparent that there are significant regional differences with respect to gas-electric coordination. The Commission should recognize that some areas, such as New England, have a unique combination of physical characteristics and market rules that may require solutions that do not apply in other regions. I. DESCRIPTION OF THE DOMINION COMPANIES Dominion Resources, Inc. (DRI) is a public utility holding company under the Public Utility Company Holding Act of 2005 and is the parent of several subsidiaries discussed below. DRI is a fully integrated energy company and a provider of electricity, natural gas and related services to customers in the Mid-Atlantic, Midwest and Northeast regions of the United States. DRI s asset portfolio consists of approximately 28,000 megawatts of power generation, 6,100 miles of electric transmission, 7,800 miles of natural gas pipeline, the nation s largest natural gas storage system with about 950 billion cubic feet of storage capacity, and a LNG-import terminal. Each of the following companies is a wholly owned, indirect subsidiary of DRI. Virginia Electric and Power Company (DVP) has a generation portfolio of more than 18,000 megawatts, which is transmitted over approximately 6,000 miles of electric transmission lines and approximately 65,000 miles of electric distribution facilities in Virginia and North Carolina. DVP is a generation and transmission owning member of PJM Interconnection, L.L.C. (PJM) and integrated into PJM on May 1,

3 Dominion Energy Kewaunee, Inc. (Kewaunee) owns and operates the Kewaunee Nuclear Power Plant with a nominally rated capacity of 543 MW located within the control area administered by Midwest Independent Transmission System Operator, Inc. Dominion Nuclear Connecticut, Inc. owns the Millstone Power Station in Waterford, Connecticut (Millstone). Millstone consists of Millstone Unit 2, an operating 875 MW reactor; and 93.47% of the ownership interest in Millstone Unit 3, an operating 1,154 MW reactor. Dominion Energy Brayton Point, LLC owns the Brayton Point Station, in Somerset, Massachusetts, which consists of three coal-fired units, one oil/gas-fired unit, and a 10-MW diesel/oil unit with a total net capacity of 1,594 MW. Dominion Energy Manchester Street, Inc. owns the Manchester Street Station, in Providence, Rhode Island, which consists of three gasfired combined cycle units with a net capacity of 495 MW. Elwood Energy, LLC is a Delaware limited liability company that owns a 100% interest in a 1,364 MW generating facility located in Elwood, Illinois and interconnected with the interstate transmission facilities of Commonwealth Edison Company and is owned 50% by Dominion Elwood, a direct, wholly owned subsidiary of DEI. Kincaid Generation, LLC owns and operates a 1,158 MW coal-fired generating facility located near Kincaid, Illinois. Fairless Energy, LLC owns a two-unit gas-fired combined cycle stations with an aggregate summer rated capacity of about 1,196 MW located in eastern Pennsylvania. II. COMMENTS A. Maintenance of existing fuel diversity is an important mitigant to natural gas reliance concerns. The maintenance of fuel diversity must be a prominent focus in addressing gas-electric interdependency. Fuel diversity protects against a variety of risks including fuel price volatility 3

4 and fuel supply or delivery disruptions. 1 Commissioner Norris noted in the Mid-Atlantic technical conference there is a cost to not having diversity and we must be mindful of the growing dependence and overreliance on one fuel source. 2 A diverse portfolio of resources is critical to maintaining effective markets and the long term reliability of the power system. Many of the resources that have historically provided needed fuel diversity are evaluating retirement decisions and compliance with environmental regulations is a major factor in these decisions. However, in RTO regions, the cost to comply with environmental regulations is also weighed against market economics. This is a critical calculation that relies upon transparent market price information in order to come to an appropriate conclusion. The Commission and the RTOs must ensure wholesale markets send transparent price signals to all resources to reflect system constraints, reliability issues, and the associated costs and risks of providing energy. Incorrect price signals (whether through improper market design or improper mitigation) or price signals sent only to gas-fired resources will distort the market. Price signals impact a resource owner s decision to invest capital to become environmentally compliant and continue operation. Without correct and transparent market prices, resources providing fuel diversity and reliability benefits operating where gas system constraints exist will make incorrect decisions about the value of their resources. Fuel diversity can be maintained by ensuring that markets send appropriate price signals to all resources. The Commission should be wary of narrowly focused market design changes that single out gas-fired resources due to the impact on fuel diversity. A single-source remedy 1 ISO-NE reported in a recent whitepaper on gas dependence that a major disruption on a New England pipeline could cause the loss of generating capacity beyond what its reserves can cover. The Algonquin pipeline has some 7,300 MW of summer capability and over 7,900 MW of winter capability, with over 3,800 MW having gas as a single fuel source. ISO-NE Whitepaper, Addressing Gas Dependence, July 2012, p. 11, available at 2 FERC Technical Conference, Coordination between Natural Gas and Electricity Markets for the Mid-Atlantic Region, August 30, 2012, webcast available at 4

5 needed to meet system operational needs. 3 This proposal creates a number of significant concerns. The top tranche, for flexible resources with firm fuel arrangements, would be procured first and by its very definition is targeted at incenting the development of gas-fired resources with firm transportation. While there are few details about how this might be implemented, the danger is that other capacity resources will subsidize the cost of the more reliable gas-fired resources. Under ISO-NE s tranche proposal, gas-fired resources will receive a premium for backing their capacity with firm fuel arrangements. However, as explained below, the overall cost of capacity will remain the same because non-gas resources could subsidize gas-fired resources through depressed capacity prices. The market would pay gas-fired resources with firm fuel arrangements more for their capacity but would pay less to other resources with fuel stored on site. This may drive fuel diverse resources out of the region as they see depressed capacity price signals that do not reflect their reliability need. On the demand side, load never sees the significantly increased costs of new requirements to address gas constraints because load s aggregate cost for capacity has remained the same. will distort price signals and force inefficient market solutions at the expense of other resources, leading to less fuel diversity as non-gas resources are driven from the market. For example, ISO- NE, as part of its Strategic Planning Initiative, has raised a potential proposal that would tranche the forward capacity market into separate segments based on unit characteristics 3 See ISO-NE, Memo from Bob Ethier to NEPOOL Concerning FCM Tranches, March 19, 2012, available at h_2012.pdf. See also, ISO-NE, Using the Forward Capacity Market to Meet Strategic Challenges, May 11, 2012, available at df. 5

6 As discussed further in the following section, non-discriminatory price signals should be sent to all resources in a market. This will appropriately value fuel diversity and provide incentives for efficient market solutions. Policies that seek to remedy problems arising from increased natural gas generation, but that undermine fuel diversity, will ultimately exacerbate the very problem those policies seek to address. B. Market-based solutions require sound market design and accurate price signals. Before undertaking significant market design changes to specifically address gas reliance concerns in the affected RTO regions, the basic energy, ancillary and capacity market designs for a region must accurately reflect the cost and risks of providing the product or service, and these price signals must be sent to all resources. i. Energy and Ancillary Services Price Signals Ultimately, accurate price signals, particularly in the energy markets, will incent market solutions to address future concerns of gas reliance. In contrast, regulatory directives that require firm transportation contracts have the potential to disrupt the markets and significantly increase costs to consumers. In order for the market to respond to a constrained gas transmission system, market participants must be exposed to the costs of the constrained system in energy prices. For offers in the Day-ahead energy market, gas-fired resources should have the ability to account for gas price risk, whether due to uncertainty over the volume needed or the actual cost of fuel, and not be subject to over-mitigation. For resources that are dispatched in Real-time or beyond their Day-ahead market award, resources should be able to update their offers to reflect any increased cost of gas due to constraints or the need to switch to higher cost oil when gas is unavailable. 6

7 It is clear the New England region is already facing operational issues due to reliance on gas-fired resources and constraints on the natural gas system. 4 A contributing factor is the inability of resources to update their offers in the energy market to reflect changing fuel prices. Additionally, ISO-NE stated it will dispatch long-lead time resources out-of-merit to address situations where gas-fired resources are unavailable due to gas constraints. This can have the effect of actually lowering energy prices since these units cannot set price while they are kept at their Economic Minimum level and the out-of-merit costs are simply passed through to load and not reflected in LMPs. 5 The inability to update energy offers and the use of out-ofmerit dispatch to address gas constraints in ISO-NE are muting price signals for market solutions to address gas system constraints. ISO-NE is taking appropriate steps to address a portion of the problem by adding hourly offer and intra-day reoffer capability. However, ISO-NE s current schedule calls for implementation in 4 th Quarter This represents a two-year span of electricity prices potentially not reflecting natural gas fuel costs during a period when it is crucial that the market communicate the costs of a currently constrained gas system. Dominion supports addition of this market capability but believes it should be a top priority and implemented as soon as possible. ISO-NE noted in its Addressing Gas Dependence whitepaper, [b]y providing generators the ability to better reflect their costs to produce electricity in real-time, ISO-NE believes generators will be more likely to respond when called to come on-line or increase production in real-time. These changes will also reduce the likelihood that electricity market prices fail to reflect fuel prices, and may also facilitate the use of more expensive northern gas and alleviate the pressures 4 See ISO-NE, Addressing Gas Dependence, at 6. 5 Id. at 7. 7

8 on the pipelines from the west. 6 In the interim, ISO-NE should consider transition mechanisms that would improve the ability of energy offers to reflect constraints on the gas system. For example, in PJM, resources may have different cost-offer curves on file that represent the costs on a constrained system and can designate the appropriate cost-offer curve if a constrained situation arises. ISO-NE should be able to implement this capability with limited impact to their existing market systems. 7 When the effects of constraints on the gas system are reflected in energy prices for all resources, the market will respond efficiently. When prices are higher because it is difficult to procure gas, market resources will have direct incentives to firm up their gas arrangements or pursue dual-fuel capability. Non-gas resources with fuel onsite or demand response resources that do not require fuel will also have value during these times. This promotes the value of fuel diversity. Additionally, gas-fired resources that clear the Day-ahead energy market but are unable to procure fuel because they lack firm transportation arrangements during a pipeline constraint will face higher balancing costs in the Real-time market. As more expensive resources are dispatched, the gas-fired resource will have the incentive to pursue firmer fuel arrangements to avoid being penalized in the future by higher balancing energy costs. The important point is that a specific solution is not imposed on a set of gas-fired generators, but rather the market signal is sent to all market participants to allow an efficient market response. ii. Capacity Market Price Signals 6 Id. at ISO-NE also identified the need to address generator offer flexibility and the cost of out-of-merit dispatch in its evaluation of the 2004 New England Cold Snap. However, while the issues and potential solutions were identified in reports, the implementation of solutions to address price transparency did not occur. See ISO-NE, ISO New England s Management Response to the October 12, 2004 publication entitled Final Report on Electricity Supply Conditions in New England during the January 14-16, 2004 Cold Snap, October 12, 2004, available at p

9 Capacity markets should work as a complement to energy and ancillary services markets and can also send important price signals regarding the existence of gas constraints. The basic capacity market model will ensure that enough capacity is available to meet the region s peak load plus a required reserve margin. Capacity revenue should cover the remaining fixed costs for existing units that are not recovered through the energy and ancillary services markets and should also signal the need for new resources to be built. In general, the capacity product is an obligation to be available throughout the commitment year to meet the demand for energy in the region. Importantly, the capacity product is specifically defined so that a diverse set of resources can all provide a MW of capacity. Capacity can come from all types of generation as well as demand response. This allows the capacity auction to procure the most efficient set of resources needed to meet resource adequacy, taking into account a resource s needed energy, ancillary services and capacity revenue. There are a couple of ways capacity market rules could be modified to improve market signals for gas constraints on the system. First, the forced outage rate formula for capacity resources could be adjusted to recognize certain times when a resource is unavailable due to gas constraints. In markets that use unforced capacity (UCAP) to determine how much capacity a resource can sell in an auction, this change appropriately limits how much capacity is purchased from resources that show a pattern of being unavailable due to fuel constraints. 8 Additionally, if the RTO uses the forced outage rates to model gas resources for calculation of the reserve requirement, the reserve margin should increase as gas resources show a decrease in availability and resources that demonstrate availability will have more value. Second, to the extent that a significant amount of gas-fired generation capability could be unavailable due to a constraint on 8 As a contrast, in ISO-NE s FCM, UCAP is not used to limit the amount of capacity a resource can sell, so the FCM auctions may continue to buy the full amount of capacity from a resource that has a history of unavailability. 9

10 the gas system, this contingency should be modeled into the calculation of the reserve margin. This increases the reserve requirement and further adds value for resources that demonstrate availability. As discussed above, the Commission should be cautious about narrow attempts to force the firm transportation costs of generators into the capacity market at the expense of other capacity resources. ISO-NE s tranche proposal could have this effect, by muting capacity price signals through lower capacity prices to non-gas resources. If total capacity costs remain the same, the lower capacity prices received by non-gas resources effectively will be subsidizing the costs of a firm gas transportation costs. Moreover, there will be no transparency in the market as load never sees the increased costs of the firm gas requirement. Any alterations to the capacity market rules should be resource-neutral and retain a broad capacity product definition so that price signals for resource adequacy are sent to all types of resources providing the same capacity product. This will allow the market to respond with efficient solutions rather than the RTO prescribing a specific outcome. C. Next steps for the RTOs and the Commission. It is clear from the discussions at the regional technical conferences that ISO-NE has the most immediate concerns regarding natural gas reliance and gas-electric coordination. This situation appears to be due to a combination of physical realities (heavy reliance on gas-fired generation, a constrained gas transmission system) and the flaws of the market design (muted price signals, weak capacity performance measures). ISO-NE and its stakeholders have already begun discussing needed market design changes. As outlined in these comments, Dominion believes that the focus should be first on fixing the basic design of the energy markets and ensuring that accurate price signals are sent to all resources. The Commission should encourage 10

11 this work to continue. Other regions, such as PJM, do not have the same level of issues faced in ISO-NE. However, all wholesale markets must have transparent price signals for market participants to understand the impact of gas reliance issues. Other regions should continue to evaluate price formation to ensure that their markets are prepared for the future. III. CONCLUSION The Dominion Companies respectfully request that the Commission fully consider the comments set forth above. Respectfully submitted, /s/michael C. Regulinski Michael C. Regulinski Assistant General Counsel Dominion Resources Services, Inc. P.O. Box (804) October 12,

12 Document Content(s) Dominion Resources Svc, Inc. Comments AD12-12.PDF