The American Public Power Association (APPA) has released its proposal to reform wholesale electricity markets run by Regional Transmission Organizations (RTOs) under federal jurisdiction. The proposal, titled the Competitive Market Plan (Plan), was developed as part of APPA's Electric Market Reform Initiative (EMRI). Studies conducted under APPA's EMRI effort have documented extensive problems in RTO-run wholesale power markets, and led APPA to the conclusion that these markets are not producing "just and reasonable" prices, as required under federal law.

"This plan recognizes that the basic RTO functions related to the operation of and access to the transmission grid are working well and should be retained, but substantially reforms the RTO-run markets for electricity supply that have benefited power generators at the expense of consumers," said Mark Crisson, president and CEO of APPA. "The Competitive Market Plan will provide a more equitable balance of benefits between consumers and suppliers while promoting a more reliable and diverse power supply to rebuild our economy and improve the environment."

The overarching goal of the plan is to create actual competition through a market structure that is more consumer-oriented, balanced, and transparent. Among other outcomes, the plan would:

• Increase the availability of long-term power supply contracts (e.g.,  10 years or more) needed to finance new electricity generation  facilities, particularly renewable generation facilities, thereby  enhancing the amount of future supply.
• Reduce opportunities for generators to exercise market power.
• Reduce price volatility and establish wholesale electricity prices  that better comport with the Federal Power Act's "just and reasonable"  standard.

A primary feature of the APPA Plan is an "optimization market" that would replace the current RTO-run spot markets with a market in which buyers and sellers can purchase or sell incremental amounts of electricity so that precise demand in each hour can be supplied. At least at the outset, prices in the optimization market would be determined using a single price clearing mechanism, but supplier bids would be limited to their actual costs of supplying energy.

Suppliers would submit their short-run marginal costs in advance to the market monitor who would then verify that actual bids match those costs. Data on bids in this optimization market would be made publicly available the following day, thus improving accountability in the market.

This and other features of the plan are designed to provide incentives to power suppliers, utility and industrial customers to develop portfolios of resources to serve load, including long-term bilateral contracts for base power supply. Generators would still have access to market-based rate authority so buyers and sellers will have the flexibility to negotiate the rates for such bilateral contracts. However, should FERC find that certain sellers have market power in long-term power supply markets, appropriate regulation of their bilateral contract prices would be required.

In the plan, APPA also makes recommendations for deregulated states in RTO regions. It urges them to take a larger role in assuring long term reliability, or "resource adequacy," in conjunction with the RTO. This would include state requirements for investor-owned utilities (IOUs) to procure a portfolio of resources through a mix of demand-side and supply-side arrangements, including longer term contracts, and allowing IOUs to own or build their own generation. In addition, the Plan recommends improving the transmission planning process to ensure there is adequate infrastructure and long-term transmission rights to support long-term bilateral contracts.

"APPA and other consumer interests have been criticized for failing to come up with solutions to the problems in these markets," said Crisson. "This plan offers the framework for such a solution that is workable and achievable. We recognize that it will take time to implement, just as it has taken time for these problems to develop. But what is required now is a willingness on the part of other industry participants, the RTOs, and federal regulators to work together to further restructure the markets in RTO regions in a manner that will truly benefit all market participants, the economy and the environment."