Public Power - September/October 2007 - (Page 42)

NOW WHAT? In late 2004, the American Public Power Association published a policy paper that characterized restructuring of the electric industry as at a crossroads. The association questioned whether the nation would continue on a path toward competitive wholesale and retail markets, or return to a more traditional form of regulation. Since that time, soaring rate increases have emerged as transitional rate caps mandated by restructuring laws have expired in several states. Resulting consumer outrage has jarred governors, regulatory commissions and legislatures into action. While retail markets appear to be advancing in a few states, such as Texas, New York and Massachusetts, governors and legislators in states such as Rhode Island, Connecticut, Ohio and Michigan are seeking to re-regulate. They follow Virginia, which withdrew its option for a competitive retail market in early 2007. Eighteen states currently have some form of retail competition. At the wholesale level, 23 states receive some portion of their wholesale power supply through a regional transmission organization. However, two large blocks of states in the Southeast and the West-Northwest oppose further formation of RTOs. It appears we have gone beyond the “crossroads” and states and regions have now begun to move down markedly different paths. Every state, every utility, and every consumer ultimately will be affected by which path is taken. In the hybrid electric system that now serves the United States, three distinct schools of thought have emerged: (1) return to rate regulation to the extent possible; (2) do not restructure any additional states and try to maintain the status quo; (3) move ahead with restructuring and expansion of RTOs or risk further crises. Among many industry observers who represent these differing views are Marilyn Showalter, John Anderson, William Hogan, and Harry Trebing. Showalter is the for42 SEPTEMBER-OCTOBER 2007 BY SCOTT RIDLEY Energy policy experts assess the state of electricity markets and offer their opinions on what path the industry should take. mer chair of the Washington state Utilities and Transportation Commission and a past president of the National Association of Regulatory Utility Commissioners. She currently serves as executive director of Power in the Public Interest, an organization formed recently by utilities to address electric industry restructuring. John Anderson is president of the Electricity Consumers Resource Council (ELCON), an organization of large industrial customers, and has been a major player in electricity restructuring issues for the last two decades. William Hogan, research director of the Harvard Electricity Policy Group, is a consultant to utilities and government on market design, and is an active participant in electric utility policy matters. Harry Trebing is a noted economist and founding director of the Institute for Public Policy Research and Education at Michigan State University. Their thoughts provide a look at some of the key concerns and alternatives that will continue to shape restructuring debates. The market problem—Everyone agrees there have been problems with the way markets have functioned and that the wholesale markets have a direct effect on retail markets. However that’s where the agreement ends. “The failures of electricity restructuring have ranged from the embarrassing to the negligent,” says Hogan. He believes that, for public officials and market participants, “the road to take depends on the diagnosis of the failures and the identification of the needed corrections.” The corrections he sees are in market design. He believes restructuring must go forward and advocates formation of new RTOs. Marilyn Showalter sees it differently. In her view, RTOs are part of the problem. “Generally what we’re seeing is that, over the past five to 10 years, prices did not increase as fast in states with traditional rate regulation as in states that restructured for competitive power supply and developed regional transmission organizations,” she says. “An argument has been raised that this is due to a high use of coal in the lower-cost states. That misses the point. If these states used a single-clearing-price auction system employed by the RTOs, then the price of power supply would have been set based on the higher price of natural gas, not the coal price. You would have seen huge cost increases and high profits for coal plant owners and nuclear plant owners, as you have seen in other states.” (In the single-clearing-price auction system, the plant with the highest price in the bid stack sets the price paid to all suppliers in the stack.) “Our position is that each area—every state or local government should be free to decide how they want to best provide electricity for their consumers,” says Showalter. “This is choice—a viable choice. Retail and wholesale structures need to be measured by their ability to deliver reliable, cost-effective, and publicly accountable service to end-use consumers over the long term.” John Anderson agrees with Showalter that the single-clearing-price auction of the RTOs presents a problem. “The wholesale markets are not working. If the single-clearing-price auction were only a small portion of total wholesale power sales—say 5 percent—you can have a spot market with this pricing system as someplace for buyers to go if they have no other alternative. The rest would be in long-term negotiated bilateral contracts. Unfortunately, today my members can only get supply offers based on spot-market prices; with adders for risk and administration and opportunity costs. The offers don’t recognize the benefit of their load factor, or the value of a good longterm sale. So my members ask: ‘Why should I buy that from a supplier? We’ll go into the spot market ourselves and cut out the adders.’ So long-term bilateral contracts are what we want to see. We’re not alone in this. Wall Street is looking for the kind of stability that long-term contracts can offer.” Formation and expansion of RTOs—HarPUBLIC POWER

Table of Contents Feed for the Digital Edition of Public Power - September/October 2007

Contents Washington Focus 10 Questions Public Power (Every) Week Training Tomorrow’s Work Force What’s in Your Wallet? U.S. Lags in Broadband Deployment Now What? For Engineers Safety Community Broadband For Governing Boards Human Resources Hometown Connections Customer Service DEED Index to Advertisers Advertisers by Category Parting Shot

Public Power - September/October 2007

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