Bilateral Contracting in Deregulated Electricity Markets - American ...

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Bilateral Contracting in Deregulated Electricity Markets - American ...

The undue reliance on short-term contracts and spot market purchases under current

policies is not what was originally envisioned by the proponents of competitive electricity

markets. As summed up by a coalition of industrial consumers, 36

In a real competitive market, power prices would be set by negotiated

transactions between willing buyers and sellers, not dictated by RTOs or

regulators or “organized markets.” In a real competitive market, suppliers would

be seeking out customers, offering longer-term bilateral contracts, and striving to

add value through innovation. In a real competitive market, barriers to entry

would be minimal or non-existent. In a real competitive market, demand

elasticity would not be an ever-present challenge. The things Industrial

Customers see every day in the current electric industry are not consistent with

the results they would expect to see in a competitive market.

Transmission planning and long-term FTRs

Two structural improvements frequently mentioned in the comments to FERC under

AD07-7 that could help to encourage increased long-term, bilateral contracting are

improved transmission planning, and availability of long-term Financial Transmission

Rights (FTRs). This suggests that a significant obstacle to long-term delivery

commitments is uncertainty regarding future transmission costs, which today can

change as frequently as every five minutes under LMP. Improvements to long-term

transmission planning on a regional basis would help assure market participants that

transmission investments will keep up with need, regardless of the immediate selfinterest

of the local utilities (or their generation affiliates) that would be responsible for

building the infrastructure. Long-term FTRs would have a similar effect on a purely

financial basis by giving market participants certainty in transmission costs over a

number of years, rather than the term of one-year or less that is currently available in

most RTOs.

On the need for long-term FTRs, Exelon writes: 37

Transmission congestion costs in organized markets can cause the price of

transmission to vary, thereby creating uncertainty for transmission customers

about the price of delivered electricity. This uncertainty impedes long-term

contracts between wholesale buyers and sellers of electricity in competitive

wholesale markets. Long-term financial transmission rights enable transmission

customers – whether load serving entities (LSEs) or generators – to enter into

long-term contracts at a fixed price and hedge the risk of congestion.


LSEs such as distribution utilities often enter into long-term contracts at set

prices with suppliers of electricity to serve their load. But when the cost of the

transmission service varies because of congestion costs, these LSEs cannot be

36 Joint comments of Industrial Consumers, Page 5.

37 Exelon comments, p. 14

Bilateral Contracting Report ▪ 26

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