New Wholesale Power Procurement Model Emerges: All-Source Auctions

In a December 15 order FERC authorized Exelon Generating (ExGen) to make market-priced power sales to its Commonwealth Edison (ComEd) public utility affiliate in an auction process that was itself recently endorsed by an administrative judge of the Illinois Commerce Commission (ICC).  The evolution of the FERC order as well as the proposed order of ICC judge is noteworthy not only because it resolves a process in which various aspects of Illinois state government were aligned in opposition to each other, but also in that it produces a wholesale power supply model that may become an increasingly common alternative to the routine of a vertically integrated public utility generating power for most, if not all, of its retail demand.

In 1997 Illinois enacted the Illinois Electric Service Customer Choice and Rate Relief Law (Restructuring Law), which resulted in ComEd divesting all of its thermal generation and spinning off its nuclear generation to ExGen, reducing its retail rates by 20 percent and freezing all tariffed electricity rates for bundled retail customers from 1997 through 2006.  During this rate freeze, ComEd has sourced its retail demand from ExGen, under a supply agreement that will expire at the end of 2006.  After 2006, the ICC expected that ComEd would market source its retail demand, including provider of last resort retail service.  Based on that expectation, ComEd and the ICC staff developed a single clearing-price auction from which ComEd could purchase from various suppliers power to satisfy increments up to 35 percent of its retail load.  Although the auction represented a thoughtful consensus of many stakeholders throughout the Prairie State, it nevertheless rankled Governor Blagojevich, Attorney General (AG) Lisa Madigan, and the Citizens Utility Board (CUB) apparently for no other apparent reason than the auction would surely result in a politically unpopular increase in prices over existing retail rates that had been frozen for nearly ten years.

In a December 5 proposed order the ICC judge approved (with few and minor exceptions) tariff provisions implementing the auction proposal and dismissed the AG's and CUB's opposition.   The first auction would be held in September 2006 and would be repeated annually thereafter.  It would be open to all eligible suppliers, including ComEd affiliate ExGen, which would, in turn, require compliance with FERC's so-called Edgar and Allegheny principles for market-priced wholesales between affiliates.  Earlier in October, ComEd and ExGen had jointly sought FERC's approval of service agreements and standardized forward contracts that would permit ExGen to make market-priced sales to ComEd in the event ExGen was selected in the auction.  FERC granted that approval based on findings that (1) the auction process was transparently designed through stakeholder collaboration, (2) the auction products "” full requirements supply for three size categories of retail customers "” were clearly defined, (3) an auction manager alone, independent of ComEd and ExGen, selected winning bids, and (4) the independent auction manager, together with ICC staff will oversee the operation and fairness of the auction.

A number of trends suggest that ComEd's experience before the ICC and FERC may increasingly become a standard model for wholesale power procurement.  Either in connection with programs introducing retail choice or as a condition on approval of any one of the growing number of utility mergers, traditional utilities are being required to divest some or all of their generation, while still retaining some retail service obligations.  Many will be required by local regulators to demonstrate through auction-like procedures that they are servicing retail customers with the lowest-cost sources of power.  At the same time, to the extent they continue to possess generation in an affiliate and wish to bid into their affiliated utility's auction, then FERC will require satisfaction of the four Edgar/Allegheny principles to prevent over-priced purchases from an affiliate.  Interestingly, in its rejection of the Illinois AG's contention that the proposed auction should be scrapped in favor of direct ComEd negotiations with ExGen and other suppliers, FERC emphasized that it "adopted the Edgar/Allegheny principles . . . to avoid the potential for affiliate abuse that could result if affiliates bilaterally negotiated contracts in private direct negotiations.

In light of these trends, there is also likely to develop soon a robust market for independent auction managers.  [FERC Docket No. ER06-43]