11 11 iii 11 11 ill 1111 11 Control Number: 47199 11 11 ...

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PROJECT NO. 47199

crrli -71

PROJECT TO ASSESS PRICEFORMATION RULES IN ERCOT'S ENERGY-ONLY MARKET

PUBLIC UTILITY COMMISION) ;11

OF TEXAS?-?

INVENERGY LLC'S REPLY COMMENTS

Invenergy LLC (`Invenergy" or "Company") respectfully submits these reply comments in response to the Commission's October 27, 2017 request for comments on the whitepaper, "Priorities for the Evolution of the Energy Only Market," sponsored by Calpine and NRG (the "Calpine-NRG Whitepapee). On December 6, 2017, Commission Staff issued a Memorandum Regarding Reply Comment Deadline that advised interested parties that reply comments filed by 3:00pm on December 27, 2017 would be considered. Therefore, this pleading is timely filed.

I. INTRODUCTION

Invenergy appreciates this opportunity to submit reply comments in this Project and looks forward to further discussing these issues with the Commission and other stakeholders. Invenergy understands the current wholesale market is not perfect, and supports the Commission taking measured responses to address certain inadequacies; such as exploring changes to the ancillary service market to better reflect the influence of evolving energy resources, technology, and consumer behavior. However, while market rules should evolve concurrently with related advancements, market changes should be methodically executed. In other words, changes should be thoroughly studied, narrowly tailored to fix a persistent, system-wide issue, and provide viable benefits with low foreseeable risks to market participants, the ERCOT market and the State of Texas as a whole. Invenergy finds that the Calpine-NRG Whitepaper's proposal of marginal loss pricing fails this threshold, and should be rejected by the Commission.

Stakeholders agree more robust, independent studies are needed that properly reflect the impacts of marginal loss pricing on the ERCOT market and market participants. As such, Invenergy has engaged PA Consulting Group, Inc. ("PA Consulting') to conduct "historical and forward-looking analyses related to the economic impacts associated with

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incorporating marginal losses on current generation."1 PA Consulting recently completed its preliminary results, and the final report is expected in February. Invenergy plans to share the final report with the Commission as soon as it is available. A memo from PA Consulting is attached to Invenergy s Reply Comments, summarizing the purpose and scope of the report.

Invenergy agrees with the majority of stakeholders that the ERCOT energy-only market is sufficiently working to support efficient investment and retirement decisions, as shown by the recent retirement announcements of older, uneconomic coal capacity. Commenters such as Calpine Corporation ("Calpine), NRG and South Texas Electric Cooperative, Inc. ("STEC") who asserted otherwise are of the minority opinion with generation fleets located near population centers. Overall, the Calpine-NRG proposals are designed to favor incumbent generators located near population centers at the expense of their customers and competitive generators located elsewhere. Such proposals, especially the incorporation of marginal loss pricing, stands contrary to long-standing policies of the Texas Legislature and the Commission.

II. REPLY COMMENTS

1. What market design reforms, if any, are necessary to support efficient investment and retirement decisions in the Electric Reliability Council of Texas (ERCOT) region?

In its comments responding to this question, Calpine uses Public Utility Regulatory Act ? 39.001(a) (PURA) to assert it is the Commission's "duty to ensure the market relies upon the normal forces of competition to produce outcomes -- the PURA declares that electric services and prices should be determined by normal forces of competition."2 But, Calpine leaves out an important section of this provision. In full, PURA ? 39.001(a) reads:

The legislature finds that the production and sale of electricity is not a monopoly warranting regulation of rates, operations, and services and that the public interest in competitive electric markets requires that, except for

I PA Consulting Group, Inc., ERCOT CREZ and Marginal Loss Impact Analysis Memorandum (Dec. 27, 2017).

2 Calpine Corporation's Comments at 2 (Dec. 1, 2017) (citing Public Utility Regulatory Act, Tex. Util. Code ? 39.001(a) (West 2007 & Supp. 2014) (PURA") (emphasis added) (Calpine's Comments).

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transmission and distribution services and for the recovery of stranded costs, electric services and their prices should be determined by customer choices and the normal forces of competition.3

ERCOT is a competitive market, and the Legislature created a market framework imbedded with certain decisive policy choices. Such policies tailored the energy-only market to the unique goals and characteristics of the State of Texas. Texas is expansive, the second largest State in the nation, with small towns and rural communities in need of affordable electricity. Invenergy agrees with Texas Industrial Energy Consumers (TIEC's) December 1, 2017 comments on this point. Specifically, that "the Legislature intentionally socialized transmission costs to recognize that all ERCOT customers benefit from a robust, integrated transmission grid, and to avoid penalizing customers areas of the state that are chronically transmission-constrained in a manner that could impede economic development."4 As a result, the energy-only market has developed in a manner consistent with the Legislature's framework, as generators have invested billions in the State since deregulation.

Invenergy has experienced first-hand the fruition and success of these policies. Invenergy owns or operates nearly 2,000 MW of both thermal and renewable assets, predominantly in West Texas, requiring the employment of 151 individuals in 11 field offices. In 2016 alone, the Company paid over $34 million in taxes, land payments, and salaries, and made over $76,000 in Good Neighbor Program donations. Much of this financial benefit was realized by West Texas communities.

Accordingly, the State's policy of socialized transmission costs has successfully accomplished its specific goals, without causing any noticeable market disturbance. In fact, the ERCOT-energy-only market is considered by many as the best in the nation.5 Yet, Calpine and NRG recommend reversing long-standing, proven successful policies in proposing marginal loss pricing. They do so by stating marginal loss pricing is a 'best

3 PURA ? 39.001(a). 4 Texas Industrial Energy Consumers' Initial Comments at 13, (Dec. 1, 2017) ("TIEC' s Comments). 5 Report to the 85`11 Texas Legislature, Scope of Competition in Electric Markets in Texas (Jan. 2017); see also, Alliance for Retail Choice, ARC 's Baseline Assessment of Choice in the United States (May 2007); and Center for Advancement of Energy Markets, Retail Energy Deregulation Index 2003, 4th Edition.

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practice employed by all other organized markets." 6 However, when it comes to transmission cost allocation, ERCOT is unlike all other organized markets. As TIEC effectively pointed out, due to ERCOT's transmission cost allocation, "marginal loss pricing is fundamentally incompatible with the ERCOT market, where the costs of transmission assets are socialized across ERCOT regardless of who benefits from a particular project."7 TIEC further notes that:

Marginal loss pricing was developed in FERC jurisdictional areas that allocate transmission costs in accordance with the 'beneficiary pays' principle, meaning that transmission costs are roughly distributed based on the benefits that a particular project provides to customers. Transmission line losses are typically allocated in the same manner, with increasing prices near load centers and decreasing prices near generation. While this approach makes sense in other markets, it is fundamentally incompatible with ERCOT's transmission cost allocation.8

Despite this, NRG lauds marginal losses as "among the most straightforward and beneficial price formation improvements the Commission could adopt . . . ."9 This position is firmly at odds with the broader community of market participants that submitted comments in this Project. From which, it is clear that marginal losses is the most contentious proposal suggested by the Calpine-NRG Whitepaper.

For example, The ERCOT Steel Mills (Steel Mills"), TIEC, Environmental Defense Fund of Texas, Inc. (EDF"), Austin Energy, The Wind Coalition, Vistra Energy, The Texas Solar Power Association (TSPA"), Texas Advanced Energy Business Alliance (TAEBA"), The Lone Star Chapter of the Sierra Club (Sierra CluV), and Invenergy all filed comments opposed to marginal losses and presented clear facts and genuine concerns as to the risks and limited benefits associated with such a sweeping market change. Exelon Corporation (Exelon"), Tenaska, Texas Competitive Power Advocates ("TCPA"), Lower Colorado River Authority (LCRA"), Dynegy Inc. ("Dynegy"), Shell Energy North

6 Calpine's Comments at 5; NRG's Response to Request for Comrnents at 11 (Dec. 1, 2017) (NRG's Comments).

7 TIEC Comment's at 13. 8 Id. 9 NRG's Comment's at 6, 11.

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America, L.P. ("Shell"), and Texas Energy Association for Marketers ("TEAM"), Rainbow Energy Marketing Corporation (REMC") either supported other proposals or asked the Commission to be conscientious of impacts to the market in implementing any of the proposals but did not advocate for marginal losses. Out of the twenty-three sets of filed comments, only two stakeholders, Golden Spread Electric Cooperative, Inc. and Direct Energy, L.P., stated they favored incorporating marginal losses but provided no reasoning or justification for doing so. And only three stakeholders--STEC, Calpine, and NRG--pushed for this proposal, despite the fact that there is no evidence that incorporating marginal losses will solve the specific issues presented.

As such, pervading the current discussion on incorporating marginal loss pricing is a general confusion among ERCOT stakeholders. As the LCRA stated in its filed comments, "LCRA and many other market participants have participated in discussions with ERCOT regarding the implementation of marginal loss pricing. It is still unclear to LCRA what assumptions are being used to evaluate marginal loss pricing."I? The LCRA is not alone, and the confusion stems from the lack of supporting data and conclusory statements made in the NRG-Calpine Whitepaper regarding the proposal. The comments of NRG, STEC, and Calpine, continued this trend.

The most prevalent conclusory statement put forth by NRG, STEC, and Calpine, is that marginal losses would send price signals to generators and to loads about the value of siting generation near load. Yet, no evidence to support this position has been provided. These stakeholders fail to recognize the system reliability and broad economic benefits that have been realized without marginal losses, and when one reads the proposals put forth by NRG and Calpine carefully, "near loar seems to mean "near Houston." In short, NRG, STEC, and Calpine's argument that marginal losses would send price signals to generators to site closer to load is unfounded as further discussed in Invenergy's reply to Question No. 3, infra.

I? Lower Colorado River Authority's Comments at 4 (Dec. 1, 2017) (LRCA's Comments).

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In their filed comments, NRG, STEC and Calpine frame marginal loss pricing as a pure economic concept;I I yet, because marginal losses is fundamentally incompatible with the ERCOT market, it has vast disproportional impacts on certain generators. As shown in the Brattle Group Report, Impacts of Marginal Loss Implementation in ERCOT, there is substantial evidence that marginal loss pricing will inadvertently harm thermal generators outside of the Houston area,12 and present a challenge to the financial viability of existing generation in West and North Texas.I3 With this, The Brattle Group Report concludes:

[G]iven the magnitude of disruption to certain generators when compared to the very small production cost savings, Commenters are convinced that implementation of a marginal loss component would not be beneficial in ERCOT. NRG attempts to undercut The Brattle Group Report by citing to one of the report's sources, which broadly supports marginal loss pricing for RTOs generally.14 However, as described previously, the Brattle Group Report confirms that ERCOT is unlike other RTOs, and given ERCOTs unique treatment of transmission cost allocation, the incorporation of marginal losses in ERCOT is not recommended.15 Similarly NRG states implementation would pay for itself within two years, citing ERCOTs "total cost (minimum)" of $10 million for implementation.I6 Yet, this ignores the Brattle Group's correlated conclusion that the $8.6 million of production cost savings comes at a cost of $239 million reduction in generator net revenues. Nor, does NRG acknowledge the controversial over-collection that would result, which is estimated to total around $205 million.17 More significantly, the

11 For example, NRG states "[w]holesale electric market design should focus on well-established economic principles and best practices rather than attempt to offset the impacts of market distortions with other distortions."

12 The Brattle Group, Impacts of Marginal Loss Implementation in ERCOT, filed in this project by First Solar Inc., Vistra Energy Corp., and The Wind Coalition (Oct. 12, 2017) (`The Brattle Group Report").

13 The Brattle Group Report at 1. 14 NRG's Comments at 14. 15 The Brattle Group Report at 1. 16 NRG's Comments at 14 (citing ERCOT's Second Report in Response to Commission Staff s Request at 4 (Sept. 29, 2017). 17 The Brattle Group Report at 3, 16.

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wind resources threatened are those that have provided a production cost savings in the hundreds of millions of dollars per year since 2010.18

Most significantly, Texas ranks first in the nation for wind capacity potential--a vast natural resource currently attracting major investments in the State and greatly contributing to the State's robust economy. These policies have resulted in "tangible societal benefits." 19 As Steel Mills recognized in its December 1, 2017 comments, investments in wind resources have Islubstantially reduced energy prices for ERCOT consumers, stimulated economic gowth within the State, attracted new industries and mitigated undesirable air emissions levels."2? NRG, STEC, and Calpine attempt to pass off marginal losses as commonsense economic theory; yet, in light of ERCOT s evolution, which is centered upon the current market framework, such a change comes at a grave risk to the market. There is good reason why overall market participants reject incorporation of marginal loss pricing, which is why it is vital to ask the simple question: who benefits?

The Calpine-NRG Whitepaper's proposals largely reward incumbent generators with local market power currently feeling the strain of competitive market forces. The proposals have direct impacts in certain portions of the State at the expense of customers and the electric system as a whole. Many of the proposals focus on the localized congestion issues of the Houston area; and, not surprisingly, Calpine and NRG own the majority of Houston's generation.21 In short, their proposals benefit their own generation, simply because they are on the right side of the transmission constraint. Taken together, their proposals support inflating prices in certain areas, interfering in the market for the benefit of incumbent generation, and ultimately resulting in prevention of efficient unit retirements. Consequently, genuine though transitory concerns regarding various shortcomings of wholesale price formation will not be resolved by implementation of marginal loss pricing. Marginal loss pricing does not resolve minor inadequacies of the

18 PA Consulting Group, Inc., ERCOT CREZ and Marginal Loss Impact Analysis Memorandum (Dec. 27, 2017).

19 The ERCOT Steel Mills' Joint Comments at 8 (Dec. 1, 2017) (Steel Mills' Comments). 20 Steel Mills' Comments at 8. 21 See generally, ERCOT, Report on the Capacity, Demand and Reserves (CDR) in the ERCOT Region, 2018-2027 (Dec. 18, 2017).

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