Public Power - September/October 2007 - (Page 43)

vard’s Professor Hogan sees the formation and expansion of RTO services under what he calls “successful market design” using single-clearing-price auctions, locational marginal pricing and other elements as the key to carrying out a federal mandate to establish wholesale power competition. He refers to a statement by FERC Chairman Joseph Kelliher that “The Energy Policy Act of 2005 embraced wholesale competition as national policy for this county.” FERC’s duty, said Kelliher, is “to make existing wholesale markets more competitive.” How hard FERC will push and risk conflicts with state regulators remains to be seen. Showalter successfully led a group of state regulators opposing FERC’s efforts to require RTOs to use a standard market design in all states in 2004. “No one should force a state to accept an RTO,” she said. “And based on experience I don’t think we’ll see expansion of RTOs. FERC seems to be saying it is disinclined to force establishment of an RTO on non-RTO regions. The problem is how RTOs and spot markets can affect pricing in neighboring areas that don’t have RTOs. FERC should try to protect the non-RTO areas from impacts of a neighboring RTO that can affect longterm prices.” (The lower-cost power in a non-RTO region could be exported to a higher-cost RTO region.) Anderson tends to agree with Showalter. “Our position is that FERC should not expand RTOs and ISOs,” he says. “We have a ‘do-no-harm’ principle. Wherever markets have not been restructured for competition, wherever plants have not been sold off to independent suppliers, don’t do it. We don’t see the benefits based on current experience.” He believes FERC will not force formation of more RTOs and ISOs. However, the commission could take an incremental approach, as it did by approving RTO status for the Southwest Power Pool, which started limited operations for energy imbalance services last February. Alternative structures—The question becomes what to do with an industry in mid-stream with about one third of the states allowing some form of retail market and nearly half the states receiving some www.APPAnet.org portion of power from an RTO. Harry Trebing favors a return to cost-based ratemaking. However, he notes, “State restructuring laws passed in the late 1990s gave no thought to what would happen if competition didn’t work. Plants that had been paid for by consumers were sold off at high prices to new independent generators—if traditional regulated rates were now applied to those plants, they would have to be based on those higher sunk costs.” Traditional standards of rate regulation could be applied in states where utilities did not divest plants, says Showalter. The equation is different in states that required utilities to sell their power plants to independent power producers in an attempt to create a competitive market. “These states need to look ahead 10 years and decide restructuring in an attempt to save it.” “After many false starts, analysis and experience have converged on the necessary elements of market design,” Hogan says. The framework “is working in places like New York, PJM, the Mid-Atlantic, and New England,” Hogan says. Good design of the real-time market, simplifies everything else. “With workable markets, market participants spending their own money would be better at balancing risks and rewards than central planners spending other people’s money.” Trebing takes an opposite track and believes regulators should be looking at “economic rents”—the amount of profits a seller of electricity receives in relation to what it costs to produce. “We have to stop these exorbitant windfalls that are occur- Traditional standards of rate regulation could be applied in states where utilities did not divest plants, says Showalter. where they want to be,” she says. “Leastcost principles should be applied. What’s the best thing to do to serve customers? Traditional state regulation has flexibility in providing answers—whether to build or purchase supply for example. It depends on cost. You can re-regulate one plant at a time as new plants are constructed.” Anderson offers a slightly different approach that would rely on negotiated wholesale contracts and least-cost plants. “Wall Street prefers to see long-term contracts backing up a new proposed plant. One way to approach the question of who should build would be for the utility to put up a straw price for the plant, based on its analysis of construction costs, and then issue an RFP. Whoever can meet or beat the price gets the contract to build the plant— and hold them to the price bid,” he says. “We have a good system of contract law in the United States, and addition of new plants can be based on a bidding and contract system like this,” he says. Hogan fears new regulations that would sow the seeds of even further regulations, a “slippery slope” that, in his view, could “undo ring for low-cost generators and we have to watch out for who dominates the RTOs.” The recent experience with PJM, in which pressure was placed on the market monitor, reveals a deep problem in governing the industry, he says. “You can’t simply have faith in the market or market design to shape behavior.” The underlying concern for everyone should be the growing concentration of the industry through consolidations and mergers and the influence large players will have on operations and future policies, he says. Consolidations—While reformers are locked into policy debates on RTOs and reregulation, the industry itself is moving forward. Trebing points out that consolidations, mergers and targeted acquisitions are reshaping the industry. “I’m concerned that incremental reforms will not be enough and will take too long to accomplish,” he says. “We need to recognize the growing concentration of the industry will affect both competitive and regulated structures for the industry. Companies are creating new centers of economic power with increased ability to influence state and SEPTEMBER-OCTOBER 2007 43 http://www.APPAnet.org

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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