Exelon Corp. (NYSE: EXC) on June 20 offered to the Federal Energy Regulatory Commission several possible reforms to build a more robust power market in the southeast U.S. region served by several Southern Co. (NYSE: SO) subsidiaries, including Alabama Power, Mississippi Power and Georgia Power.
Exelon submitted these comments on the issues raised in a notice and at a May 23 Technical Conference related to the market-based rate authorization of these Southern subsidiaries. The energy auction in that region, as it is currently formulated, is not as robust as it could be to mitigate the potential to exercise market power in the Southern Companies’ balancing authority area (the “Southern BAA”) and its first tier markets, Exelon said.
In April 2015, the commission instituted a proceeding pursuant to section 206 of the Federal Power Act to determine whether the Southern Companies’ market-based rate authority is just and reasonable and directed the Southern Companies to: show cause as to why the commission should not revoke the Southern Companies’ market-based rate authority; file a mitigation proposal tailored to their particular circumstances that would eliminate their ability to exercise market power; or inform the commission that they will adopt the default mitigation set forth in the commission’s regulations or propose other cost-based rates and submit cost support for such rates.
In May 2015, the Southern Companies requested rehearing of the Section 206 Order, arguing that the energy auction prevents the Southern Companies from engaging in withholding or otherwise attempting to charge excessive prices.
On May 4 of this year, the commission initiated a technical conference to discuss issues related to the Southern Companies’ market-based rate authorization, including potential improvements to the energy auction.
The energy auction was conditionally accepted by the commission in 2008 as a means to mitigate the potential for the Southern Companies to exercise market power. The energy auction consists of a day-ahead and hour-ahead auction through which the Southern Companies are required to offer to sell all available energy subject to cost-based caps. The day-ahead auction offers a 50 MW block of firm liquidated damages (LD) energy and recallable energy for a 16 hour period from 6 a.m-10 p.m. The hour-ahead auction consists of a non-firm 1 MW energy product. All products sold in the energy auction are deliverable “into Southern.” If there is a match between an offer and a bid, the auction will clear and the transaction may be consummated through a bilateral contract. Since the introduction of the energy auction, participation has been scarce in both the day-ahead and hour-ahead auction, with 16 transactions matching since the beginning of 2016, Exelon noted.
Through its subsidiary companies, Exelon sells and buys power in the Southern BAA and first tier markets. Exelon owns Hillabee Energy Center, a 740 MW combined cycle plant located in the Southern BAA. Exelon is also developing a 50 MW steam/biomass facility in Albany, Georgia, which has an anticipated commercial operation date of June 1, 2017. Exelon also serves wholesale load within the Southern BAA. Through its subsidiaries, Exelon also has participated in both the day-ahead and hour-ahead energy auctions as a buyer and a seller.
“With over seven years of experience with the energy auction, Exelon believes that the structure of the auction could be materially enhanced by a number of reforms discussed herein, which will enable the auction to attract more participation and serve the purpose for which it was intended,” the company said. “This package of reforms includes changes to address: (1) product delivery; (2) product availability; (3) clearing mechanism; (4) pricing; and (5) auction timing.
“Southern Company acknowledges that the energy auction is ‘not robust,’ and Exelon agrees. The data demonstrates that the auction has remarkably low levels of participation and lower levels of matching. Despite offering over 4,800 MW into the day-ahead energy auction and bidding over 1,700 MW in the day-ahead energy auction, Exelon never matched in all of 2015. In the same year, Exelon bid in 288 hours in the hour-ahead auction, matching bids 27 percent of the time for 23 percent of the volume that we bid to buy. All told, we bought in less than 1 percent of all hours that the hourly auction ran in 2015. Exelon matched sell offers in even fewer hours and for fewer MWh in 2015. Each time that Exelon matched, the counter-party was Southern Company. In Exelon’s experience, the level of participation does not allow the auction to serve its intended purpose as currently structured. However, with a number of reforms, the auction’s functionality can be significantly improved.
“The day-ahead energy auction only offers two on-peak products. These products are among the most liquid and heavily traded in the bilateral markets, and Exelon supports the continued inclusion of these products in the auction. However, transmission is purchased for a 24 hour period, and by offering only an on-peak product, participating in the energy auction carries a higher risk that that transmission may not be used for the full 24 hour period and therefore, impose a higher cost on the on-peak transaction. In contrast, using traditional bilateral means of transacting, assuming a willing buyer and a willing seller, a diverse array of products that suit participants’ needs and the needs of their customers can be obtained.
“In part due to the limited products available in the energy auction, auction participation levels have remained low since its inception. Exelon generally participates as a buyer in the auction only when Exelon has unused transmission remaining from the day-ahead bilateral market. Therefore, Exelon does not rely on the auction as a primary means of buying or selling energy. However, should additional products be incorporated into the energy auction, and the other changes identified in this proceeding are made, Exelon would rely more heavily on the auction to transact. Therefore, Exelon supports the recommendation on the Southern Companies’ slide 40 to incorporate day-ahead, off peak products. In particular, Exelon supports the introduction of a 2×16 and a 7×8 product. These two products are among the most highly liquid products traded in the bilateral market. Exelon also supports the addition of an around-the-clock (7×24) product, which Exelon believes would help to alleviate some of the unit commitment constraints that the Southern Companies identified in the Technical Conference.
“If the auction provides the opportunity to buy and sell during both on and off peak periods, this will also help support transmission procurement. Incorporating additional products will increase participation in the auction and should reduce prices for consumers. We thus request that the Commission direct the Southern Companies to make a tariff filing adding these three products within 60 days of an order in the section 206 proceeding.”