FTC Staff Comment Before the Federal Energy Regulatory Commission Concerning Integration of Variable Energy Resources

UNITED STATES OF AMERICA
BEFORE THE
FEDERAL ENERGY REGULATORY COMMISSION
Integration of Variable Energy Resources 	) 	Docket No. RM10-11-000
COMMENT OF THE STAFF OF THE FEDERAL TRADE COMMISSION
March 1, 2011
Background and Summary
The Federal Trade Commission (FTC) Office of the General Counsel and Bureau of
Economics appreciate this opportunity to comment on the Federal Energy Regulatory
Commission’s (FERC’s) Notice of Proposed Rulemaking (NOPR) regarding integration of
variable energy resources (VERs) 1 with grid operations.2 Integration of Variable Energy
Resources, Docket No. RM10-11-000, 133 FERC ¶ 61,149 (2010). 3 The Proposed Rule would
(1) require public utility transmission providers to offer intra-hourly transmission scheduling; (2)
require VERs to provide meteorological and operational data to public utility transmission
providers, for the purpose of improving power production forecasting; and (3) allow public
utility transmission providers to request to charge higher prices to VERs if VERs add a
disproportionate amount to the cost of regulation service. FERC expresses the view that the
proposed reforms will remove barriers to the integration of variable energy resources, while also
avoiding favoritism toward VERs.
The first two elements in the proposed rule are likely to facilitate integration of VERs at
lower costs, as FERC maintains. Consumers are likely to benefit not only from prices lower than
they would have been without these reforms, but also from environmental benefits associated
with switching to renewable energy sources. As discussed in the FTC’s comment on FERC’s
Notice of Inquiry (NOI) in this docket, intra-hourly transmission scheduling is likely both to
accommodate VERs and to better match demand response technologies that can contribute to the
1 The term “variable energy resources” refers primarily to generation facilities powered by wind
or directly by solar radiation.
2 This comment expresses the views of the FTC’s Office of the General Counsel and Bureau of
Economics. The comment does not necessarily represent the views of the FTC or of any
individual Commissioner. The FTC, however, has voted to authorize the filing of this comment.
3 75 Fed. Reg. 75336 (Dec. 2, 2010).

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integration of VERs with grid operations.4 The FTC’s comment on the NOI also pointed out that
better micro-forecasting of weather can help increase the efficiency of wind generation and
improve the accuracy of forecasts of generation by VERs. 5 Both effects would increase the
productivity of the electricity system and benefit consumers by reducing costs and prices for
electric power.
The third element in the proposed rule addresses how best to structure and pay for
remedies to correct imbalances in the electricity system. The focus is on periodic situations in
which VERs experience large, rapid, unanticipated changes in output.
We encourage FERC to refine the third element of the proposed rule by expanding upon
Paragraph 89 of the NOPR, which identifies ways for a VER to satisfy its regulation service
obligations without having to buy regulation service from the transmission provider. This
refinement is likely to benefit customers by facilitating the least costly approaches available to
meet VERs’ regulation service obligations. We also recommend that FERC consider whether
the costs of “imbalance services” provided to other types of generators can readily be identified
and charged to the responsible parties.6 Customers will benefit if costs are accurately allocated
to the activities that give rise to these costs. By contrast, when costs are allocated more broadly
than is efficient, there can be price distortions and resource misallocations that reduce overall
consumer welfare. The changes that we propose likely will enable VERs to play a larger role in
producing electricity, which will expand the supply options available to satisfy electricity
demands and could benefit consumers by minimizing future utility bills.
Interest of the FTC
The FTC is an independent agency of the United States Government responsible for
maintaining competition and safeguarding the interests of consumers, both through enforcement
of the antitrust and consumer protection laws and through competition policy research and
advocacy. The FTC often analyzes regulatory or legislative proposals that may affect
competition or allocative efficiency in the electric power industry. The FTC also reviews
4 Comment of the Federal Trade Commission before the Federal Energy Regulatory
Commission, Integration of Variable Energy Resources, Docket No. RM10-11-000, § III.B (Apr.
8, 2010), available at http://www.ftc.gov/os/2010/04/V100009ferccomment.pdf.
5 Id., § III.C. In late January 2011, the Department of Energy and the Department of Commerce
signed a memorandum of understanding that affirms the importance of improved localized
weather forecasting for both the efficiency of power generation by VERs and the integration of
VERs into the grid. Memorandum of Understanding on Weather-Dependent and Oceanic
Renewable Energy Resources between the U.S. Department of Energy Office of Energy
Efficiency and Renewable Energy and the U.S. Department of Commerce, National Oceanic and
Atmospheric Administration (Jan. 24, 2011), available at
http://www.noaanews.noaa.gov/stories2011/images/28812.pdf.
6 In some instances, however, the costs of undertaking a more accurate allocation may exceed the
benefits, and therefore the allocation should not be undertaken.

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proposed mergers that involve electric and natural gas utility companies, as well as other parts of
the energy industry. In the course of this work, as well as in antitrust and consumer protection
research, investigation, and litigation, the FTC applies established legal and economic principles
and recent developments in economic theory and empirical analysis.
The energy sector, including electric power, has been an important focus of the FTC’s
antitrust enforcement and competition advocacy.7 The FTC’s competition advocacy program has
produced two staff reports on electric power industry restructuring issues at the wholesale and
retail levels.8 The FTC staff also contributed (as did FERC staff) to the work of the Electric
Energy Market Competition Task Force, which issued a Report to Congress in 2007.9 In
addition, the FTC has held public conferences on energy topics, including Energy Markets in the
21st Century (April 10-12, 2007)10 and Carbon Offsets & Renewable Energy Certificates
(January 8, 2008). 11 The FTC is in the process of updating its Guides for the Use of
Environmental Marketing Claims, which help marketers avoid making deceptive environmental
claims about their products and services, including electricity.12
7 See, e.g., Opening Remarks at the FTC Conference on Energy Markets in the 21st Century:
Competition Policy in Perspective (Apr. 10, 2007), available at
http://www.ftc.gov/speeches/majoras/070410energyconferenceremarks.pdf. 	FTC merger cases
involving electric power markets have included the DTE Energy/MCN Energy (2001) (consent
order), available at http://wwwftc.gov/os/2001/05/dtemcndo.pdf; and PacifiCorp/Peabody
Holding (1998) (consent agreement), available at
http://www.ftc.gov/os/1998/02/9710091.agr.htm. (The FTC subsequently withdrew the
PacifiCorp settlement when the seller accepted an alternative acquisition offer that did not pose a
threat to competition.)
8 FTC Staff Report, Competition and Consumer Protection Perspectives on Electric Power
Regulatory Reform: Focus on Retail Competition (Sept. 2001), available at
http://www.ftc.gov/reports/elec/electricityreport.pdf; FTC Staff Report, Competition and
Consumer Protection Perspective on Electric Power Regulatory Reform (July 2000), available at
http://www.ftc.gov/be/v000009.htm (compiling previous comments from the FTC staff provided
to various state and federal agencies).
9 See http://www.ferc.gov/legal/fed-sta/ene-pol-act/epact-fina-rpt.pdf.
10 Conference materials available at
http://www.ftc.gov/bcp/workshops/energymarkets/index.shtml.
11 Conference materials available at
http://www.ftc.gov/bcp/workshops/carbonoffsets/index.shtml. Other programs have included the
FTC’s public workshop on Market Power and Consumer Protection Issues Involved with
Encouraging Competition in the U.S. Electric Industry, held on September 13-14, 1999
(workshop materials available at http://www/ftc.gov/bcp/elecworks/index.shtm); and the
Department of Justice and FTC workshop on Electricity Policy, held on April 23, 1996.
12 Materials are available at http://www.ftc.gov/bcp/edu/microsites/energy/about_guides.shtml.

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The FTC and its staff have filed numerous competition advocacy comments with FERC
and participated in FERC technical conferences on market power issues. For example, in March
2007, the Deputy Director for Antitrust in the FTC’s Bureau of Economics served as a panelist
for a technical conference on FERC’s merger and acquisition review standards under the Federal
Power Act (FPA) Section 203 (Docket No. AD07-2-000). Similarly, the FTC submitted a
number of comments last year in FERC proceedings, including Demand Response Compensation
in Organized Wholesale Energy Markets (Docket No. RM10-17-000)13 and Transmission
Planning and Cost Allocation by Transmission Owning and Operating Public Utilities (Docket
No. RM10-23-000).14 Since 1994, the FTC has commented on a variety of FERC’s initiatives to
promote wholesale electricity competition and on several state issues associated with
restructuring of the electric power industry.15
Generator Regulation Service-Capacity
FERC’s Framework for Pricing of Regulation Service
The framework that FERC creates for discussion of generator regulation service-capacity
rejects proposals to relieve public utility transmission providers of the obligation to offer
generator imbalance service.16 At the same time, FERC accepts the proposition that more
generator imbalance service costs should be allocated to VERs, provided that such additional
costs can be attributed accurately to VERs and that the transmission provider has taken the
necessary steps to avoid excessive costs. Intra-hourly transmission scheduling and improved
forecasting of VERs’ generation are the only two steps that FERC proposes to require from
public utility transmission providers at this time, 17 although the NOPR references other possible
measures. 18
13 This comment is available at http://www.ftc.gov/os/2010/10/1010wholesaleenegrymarkets.pdf.
14 This comment is available at http://www.ftc.gov/os/2010/09/100929transmissionplanning.pdf.
15 For a listing of FTC and FTC staff competition advocacy comments to federal and state
regulatory agencies (in reverse chronological order), see
http://www.ftc.gov/opp/advocacy_date.shtm.
16 NOPR PP 84, 87, 89.
17 Id. PP 97-98.
18 See id. P 96, where FERC cites – but does not propose to require – a more extensive list of
supportive activities for public utility transmission providers proposed by the American Wind
Energy Association: “fast intra-hour market and intra-hourly scheduling; a robust ancillary
services market; the option for third-party or self supply of ancillary services; dynamic transfer
capability out of the balancing authority area; and Area Control Error (ACE) diversity
interchange or an Energy Imbalance Service market.”

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The Generator Regulation Service-Capacity section of the NOPR sets out to establish a
generic cost recovery mechanism for regulation services that public utility transmission
providers already must provide.19 The heart of the proposal concerns charging VERs higher
prices for regulation service upon a determination that VERs account for a disproportionate share
of the costs of such service, as calculated through the use of cost causation principles.20 The
charges cover the reserves required to preserve reliability through regulation services.
FERC Should Provide a More Detailed Specification of Self-Supply Alternatives
FERC’s proposal articulates principles for determining differential regulation service
charges that VERs would have to pay if they buy regulation service from public utility
transmission providers. The proposal provides little detail, however, regarding an alternative
that we think merits more attention: a VER’s provision of its own regulation services.
The proposed rule simply states that a transmission customer would be allowed to
“demonstrate that it has satisfied its regulation service obligation through dynamically
scheduling its generation to another balancing authority area or by self-supplying regulation
reserve capacity from generation or non-generation sources.”21 We are concerned that this
sparse description of an important alternative may result in regulatory uncertainty that could
discourage VERs from using more efficient self-supply options. The vagueness of FERC’s
pronouncement might induce a VER to forgo lower-cost self-supply options out of fear that one
of its public utility transmission providers will interpret vague guidance from FERC as an
invitation to undervalue the VER’s self-supply of regulation services. This would result in
excessive charges for regulation services provided by the transmission provider.
Vague guidance also might lead a transmission provider to conclude that it has no
obligation to permit a VER to self-supply regulation services. In such a case, the transmission
provider might prevent entry from a more efficient supplier of such services. Because self-
supply potentially can serve to expand output – including in response to higher prices – policies
that prohibit self-supply could have obvious harmful effects on competition and consumers. A
more detailed description of how self-supplied regulation services can satisfy a VER’s regulation
service obligation would reduce this uncertainty and facilitate the use of the most cost-effective
forms of regulation service (whether self-supplied or purchased from one or more public utility
transmission providers).
Accordingly, we encourage FERC to provide a more complete delineation of this element
of the proposed rule contained in Paragraph 89 of the NOPR. In connection with this expanded
explanation, we further recommend that FERC consider explicitly recognizing that VERs can
address regulation service obligations by matching their generation variability to demand
variability. As the FTC stated in the NOI phase of this proceeding:
19 Id. P 91.
20 Id. P 94.
21 Id. P 89.

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The expansion of VERs may require further disaggregation or the addition of new
commodities (services) to power markets. This could enable markets to dispatch
the system more efficiently by rewarding the facilities and programs that can
supply power and ancillary services at least cost to society. This, in turn, should
prompt more efficient investment decisions. For example, electricity markets
could trade a commodity (service) consisting of a contract to provide (on average)
a megawatt of power over an hour that allows significant flexibility about when
the power will arrive. A 4-megawatt wind farm that is experiencing gusty winds
– and thus expects to produce at an average of 25 percent of its capacity (i.e., one
megawatt) during an hour – could sell this contract. Such a contract could be
paired with contracts sold to buyers with variable demands, so that the system
operator could utilize both variable supplies and variable demands to ensure
system stability and reliability. Within this example, buyers could contract for the
lower-cost, variable supply to run hot water heaters, create stockpiles of crushed
rock that can be mixed with concrete, charge plug-in electric or hybrid vehicles,
or pursue similar flexible end-uses. As discussed at several points in the
remainder of this comment, trading an electricity commodity that better reflects
the output patterns of VERs could improve integration of VERs in several aspects
of power markets. Demand-side purchases of power with an uncertain schedule
may be an effective way for customers to participate in keeping electricity
systems in balance.22
Caution in Reviewing Regulation Cost Allocations Proposed by Public Utility
Transmission Providers
FERC proposes to allow individual public utility transmission providers to develop ways
to allocate disproportionate regulation service costs to VERs.23 FERC may wish to avoid
proposals to allocate regulation service costs that discriminate unduly against VERs. Such
discriminatory allocations include those that focus on the variability of generation supplied at a
single VER facility but (1) fail to take account of the economies of massed reserves in supplying
regulation service to VERs 24 or (2) fail to consider how a system operator can reduce the
22 FTC comment, supra note 4, at 6.
23 NOPR P 105.
24 In a comment to the Public Utility Commission of Pennsylvania that discussed strategies that
utilities could apply to stifle efficient distributed generation investment, the FTC also stressed
that it is important for regulators to recognize economies of massed reserves in efforts to protect
system reliability. Reply Comment of the Federal Trade Commission before the Public Utility
Commission, Commonwealth of Pennsylvania, in the Matter of Energy Efficiency and
Conservation Program and EDC Plans, Docket No. M-2008-2069887, Section III.E (Dec. 17,
2008), available at http://www.ftc.gov/os/2008/12/V090001papuc.pdf. In the case of VERs,
there are likely to be economies of massed reliability reserves because it is unlikely that all VERs
will stop generating simultaneously. As a result, reserves held to assure reliability in the
presence of one VER also partially assure system reliability in the presence of other VERs.

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variability of VERs’ generation by dispatching geographically dispersed VERs that are subject to
differing weather patterns. Discriminatory cost allocations directed against competitors could be
characterized as a regulatory version of raising rivals’ costs and can lessen competition.
More Detailed Allocations of Regulation Costs May Be Appropriate for Other
Generation Groups
The FERC proposal appropriately spotlights VERs as a group of transmission customers
that may cause above-average costs for regulation and other reliability services. But other
groups of transmission customers may also cause above-average costs. FERC should be alert to
types of transmission customers (other than VERs) that cause differential costs in the power
system’s reliability efforts. A policy that singles out VERs for higher charges because they
cause higher regulation costs could result in discriminatory prices if other groups of transmission
customers cause higher (or lower) costs for regulation and other reliability measures but escape
being subjected to higher (or lower) charges.25 A failure to apply equivalent cost causation
principles to such customers could lead to prices for power sources that do not reflect true
resource costs. As a result, these price distortions likely would yield a mix of power sources that
is not efficient, which in turn could raise prices for consumers above what they otherwise would
be.
25 Discrimination occurs when a supplier – in this instance, a transmission provider – makes
higher profit margins in serving some customers than it earns from others. Charging the same
price to customers who cause different levels of costs can be just as discriminatory as charging
different prices to customers who cause the same level of costs.