Letter to FERC outlining our thoughts on how to redesign wholesale power market pricing mechanism

For years, I have been advocating for a wholesale change in how power is priced in the wholesale electricity markets. And, I wish to be heard on this matter, because I believe that my views are not only intelligent and cogent, but also on-point to a future grid that is both reliable and resilient.

From my perspective, there are five main issues that must be resolved to maintain a grid that is both reliable and resilient for the long-term:
Renewable power disruption of wholesale power pricing
Proper compensation of reliability and resiliency characteristics of generation
No regression to “cost-of-service” rates
No “freebies” to businesses
Redesign must be based on market principals

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Power Company Privatization will Lead to Unintended Consequences

Lately there has been talk about privatizing power companies, including both CPN and NRG, and while we believe that the most rational course for these companies may be to go private – given the lack of “enthusiasm” for these names in the public markets – we are certain that the end result will not be either what the market expects nor what the regulators, politicians and, most of all, what the consumers desire
The assumptions we are making in our analysis are as follows:
Private equity (PE) investors are not unintelligent and will act in their own self-interest
Virtually all of the market (public and private) believe in the theory of “all else being equal”
Market forces move along least resistant path absent paradigm shift, typically externally imposed
As reserve margins dip below 12% market prices become more volatile and margins begin to expand at an accelerated rate
PE investors will be betting on the reduction of debt from internally generated free cash flow and asset sales, supplemented by cost reductions, to increase the equity value of its investments with the option value of changing market dynamics to further boost its rate of return
The first thing that PE investors are likely to do is to make the assumption that the underlying market forces and conditions don’t/can’t/won’t change for the foreseeable future
Based on these underlying assumption, PE investors will be able to figure out which plants they buy will remain profitable, which won’t and which are on the margin

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