By Tom Kleckner

A Sierra Club report released last week that said captive customers of SPP utilities are paying for uneconomical coal plants has drawn considerable pushback from the RTO and some of its members.

But the head of SPP’s Market Monitoring Unit (MMU) says the environmental group has a point in its criticism of utilities that self-commit coal generators when the RTO’s market prices don’t cover their operating costs.

When a utility self-commits a unit, it operates the plant regardless of whether SPP’s market clearing prices are sufficient to cover the plant’s marginal costs. Although self-committed units are ineligible to receive make-whole payments from SPP, the Sierra Club says, some units are apparently recovering losses from captive customers through state ratemaking proceedings.

The Sierra Club report, “Backdoor Subsidies for Coal in the Southwest Power Pool,” alleges that utilities in the footprint operate coal plants outside the wholesale markets, generating $300 million in excess costs that consumers were forced to pick up in 2015 and 2016.

SPP and its members responded by saying the Sierra Club’s analysis relied heavily on wholesale rates, which aren’t the same as retail rates that are subject to public policy and regulations. Nor do wholesale rates consider the cost of long-term supply contracts or ensuring grid reliability, they said.

MMU Sees Problem

Keith Collins, executive director of the MMU, says that while the report took some of the MMU’s observations out of context, self-commitment is a problem in the RTO’s markets. MMU staff raised the issue in their 2016 State of the Market report, which Collins reviewed with SPP’s Board of Directors and Members Committee in July.

The Sierra Club said it conducted a “high-resolution analysis” of 14 coal plants in SPP’s footprint. It used hourly market data to develop each plant’s cash flow analysis.

“All 14 units operated for extended periods of time when, objectively, it would have been less expensive for the electric bills of utility customers for the plants to sit idle,” the group’s report said. “The utilities that own each of the 14 coal units we examined would have saved its customers money if the coal units had operated less often.”

The report said all but one of the 14 units studied were owned by state-regulated utilities, municipal utilities or an electric cooperative with captive customers.

Utilities should be purchasing electricity for its captive customers in the SPP Integrated Marketplace (IM), the report said. But it said some utilities “appear to be going back to state commissions and using rate cases and other dockets to obtain ratepayer-funded subsidies for costs incurred in operating otherwise uneconomic coal plants.”

“In the SPP market, where nearly half of the resources are self-committing, how much of an energy market can SPP really be claiming to operate?” the report asked. “The consequence of these facts is that the SPP Integrated Market is possibly a market in name only. The impact of utility self-commit and underbidding energy offers within the SPP IM might be the most anticompetitive and anti-consumer behavior in any integrated electricity market anywhere in North America.”

The report also says self-committed coal units are denying revenues to independent merchant generators. “RTOs are supposed to create nondiscriminatory rates, but allowing coal units to self-commit discriminates against those operators that don’t have captive customers to fund a ratepayer subsidy. Moreover, it is discriminatory and unreasonable for the market to ask one subset of customers to pay above-market costs while all other customers pay market costs.”

Collins told the board and members that self-commitment of resources has declined but is “still very big.”

“When resources are self-committing, it can put downward pressure on prices also,” he said at the time, referring to the effects of incorporating uneconomic resources in wholesale prices.

“The point of the [Sierra Club’s] report is consistent with what we noted in the 2016 annual report,” Collins told RTO Insider. “Self-commitment can distort the market. It’s a message we’ve been presenting as well.”

The MMU report noted generation offers in the day-ahead market averaged 48% as “market” commitments and 35% for “self-commit” in 2016. Those numbers were 46% and 39%, respectively, in 2015. Outages accounted for the remainder.

The Sierra Club report quoted the MMU report, which said plants self-commit because of contract terms, low gas prices “that reduce the opportunity for coal units to be economically cleared in the day-ahead market,” long start-up times, and “a risk-averse business practice approach.”

Collins took exception to the Sierra Club’s claim that “reliability isn’t one” of the reasons why a unit might self-commit.

Although the MMU’s report didn’t cite reliability, Collins said, “reliability could play a factor where some of these resources self-commit. Our report identified a set of reasons for self-committing, rather than a complete list.

“We have been discussing this essentially since I’ve been here,” said Collins, a former FERC staffer who joined SPP in June from CAISO. “What are the factors [behind self-commitment]? What can we do to promote more market commitment? Some of it is education and creating awareness. At least there’s a dialogue there that’s begun.”

SPP Disagrees

SPP General Counsel Paul Suskie said in a statement that the RTO disagreed with the report’s fundamental assertion that “utilities’ option to either self-commit resources or purchase from the market equates to a subsidy and undermines the effectiveness and cost-efficiency of SPP’s Integrated Marketplace.”

Suskie said that “assessing the market’s fairness and effectiveness based on wholesale cost of electricity to consumers does not take into consideration a number of factors that may lead utilities to self-commit.” He listed contractual obligations, capital investments, public policy and fossil fuels’ contribution to renewable resources’ deliverability as among those factors.

“Our day-ahead market has functioned successfully for four years and, in that time, has reduced the cost of energy in our region by more than $1.25 billion while continuing to ensure the reliability of the grid,” Suskie said.

Peter Main, a spokesman for SPP member Southwestern Electric Power Co., said the company bids its generation into the RTO’s markets under its market protocols and will continue “to seek opportunities” to produce net energy revenues benefiting its customers.

“The Sierra Club report does not provide an accurate portrayal of the incremental (variable) costs and revenues associated with offering generation into the SPP Integrated Marketplace,” Main said in a statement.

Plant Operators Dispute Findings

According to the report, SWEPCO’s Dolet Hills and Pirkey plants in the East Texas-Louisiana region burdened customers with $210 million in costs in 2015 and 2016. However, SPP said the plants serve load in “locations in northeast Texas without significant wind.”

Oklahoma Gas and Electric, which owns two of the plants identified in the study, has said the units stopped self-committing into the market more than two years ago. Two other generators — Entergy-owned or co-owned plants in Arkansas — serve load in MISO.

Al Armendariz, with the Sierra Club’s Lone Star chapter, said he was confident the group has a “good handle on the cost to run these coal plants in SPP.”

Armendariz, who worked in EPA under President Barack Obama, said the Sierra Club compared the SPP LMPs paid to power plants in the immediate vicinity of the coal plants studied. The organization obtained operating data from S&P Global Market Intelligence, the U.S. Energy Information Administration and SPP in running its analysis.

“Our report is really a comparison of the revenue for electricity, compared to what it costs to actually run the power plant,” Armendariz said.

Rule Changes Sought

The Sierra Club would like to see several things happen, Armendariz said. “We think SPP should clarify its rules to require power plants to bid in their real cost of fuel and other variable [operations and maintenance] … in the day-ahead market.”

Armendariz also said the Sierra Club would like to see state commissions in SPP’s footprint “investigate this problem of self-commitment and disallow the recovery of costs borne by consumers when uncompetitive coal plants are operating.”

“Vertically integrated utilities should not be forcing their customers to pay the variable costs,” he said. “State commissions should not allow the recovery of those costs through the rate base.”

Asked whether the group planned to file a complaint with FERC, Armendariz told RTO Insider that the Sierra Club “is evaluating all avenues of legal recourse that may be available to rectify the problems.”

Both Armendariz and Collins agreed the problem of self-commitment is not unique to SPP. Collins said he saw self-dispatch at CAISO and “knows” it occurs in other markets. Armendariz said although uncompetitive coal plants are running in “virtually every market … the problem seems most acute in SPP.”

The MMU believes that will change as market participants continue to familiarize themselves with SPP’s day-ahead and real-time markets, which have been in operation for less than four years.

“It appears that resource owners are becoming more confident in the market and allowing the market to commit the resource instead of self-committing their resource,” the State of the Market report said.

The Monitor also said the market systems’ optimization algorithm is restricted to a 48-hour window. “Hence, large baseload resources with long-lead time and substantial start-up costs may not appear economic to the day-ahead market commitment algorithm,” the report said.

Collins said SPP’s Market Working Group has discussed a potential multiday optimization approach. A Tariff change has yet to materialize, he said, “but that could help address some of the concerns.”