Significant majorities of state regulators believe FERC’s standard market design (SMD) proposal for U.S. wholesale power markets is “fatally flawed” and will only lead to wide inequities between high and low-cost electricity regions, according to the results of a new survey unveiled last Wednesday by RKS Research & Consulting and Standard & Poor’s (S&P).

Moreover, a majority of commissioners express doubt that the SMD proposal will ever deliver promised benefits to rate-paying consumers, the survey found.

The survey found that commissioners from the Midwest and states offering a degree of choice in electricity markets expressing guarded to neutral assessments of SMD, while regulators from the South and West, plus regulated states, registered opposition by margins by as much as 10-1. Respondents cited inflexibility, cost-shifting between states and the absence of a compelling need as their reasons for negative reactions to the SMD.

“From these responses, it is apparent that state regulators will be unwilling to cede their jurisdiction to FERC,” said David Cohen, former chairman of the New Mexico Public Utilities Commission and special advisor to RKS and S&P on the regulatory responses. “Absent new Federal legislation, it appears that litigation is a probable outcome.”

Meanwhile, the survey found a plurality of commissioners — 45% to 33% — opposed to repealing the Public Utility Holding Company Act (PUHCA). Again, regulators representing non-choice states are most negative, registering opposition to repeal of PUHCA by a 2-1 margin.

The results are part of the 2003 S&P survey of state regulators, conducted by RKS Research. During January and February, RKS completed telephone interviews with 98 regulators — including 87 sitting commissioners — representing 47 separate jurisdictions. RKS performed its first regulators’ survey for S&P in 1995 and completed the second edition in January 2001.

State regulators were canvassed prior to the issuance of a white paper issued by FERC last month updating where the federal agency is headed with the proposal. The white paper was an attempt by the Commission to mollify state and congressional concerns over the sweeping proposal.

In contrast to the 2001 survey, state commissions are clearly more concerned about utility financial health. By a 2-1 margin, for example, regulators called the financial health of utilities in their jurisdictions worse than three years ago. More than a third said that they are extremely concerned about the financial condition of utilities in their area. And a quarter of these respondents — 26% — now have less confidence in the integrity of utility financial statements, according to the survey.

But while 53% of commissioners in this survey (down from 74% two years ago) said that their state has explicit laws that require the regulated utility’s financial affairs to be insulated from those of the unregulated affiliates within the holding company, most regulators remain divided over just how authority these laws confer.

In the Midwest, South, and West, more than half the regulators said that these laws provide little or no authority to insulate the regulated utility from the unregulated subsidiaries within the holding company.

Only in the Northeastern region do more than half of the commissioners believe these laws provide sufficient authority to prevent the regulated utility from being affected by the activities of its unregulated affiliates.

“These latest results highlight major shifts of attention and opinion among regulators since our 2001 survey,” said David J. Reichman, RKS chairman. “In fact, in our 2001 regulator survey report we projected that the strong regulatory focus on transmission and reliability issues to the exclusion of financial matters could portend serious consequences for electric utilities — a situation that now permeates our latest findings.”

The survey also found that the adequacy of the nation’s transmission system, the major concern in the 2001 survey, continues to trouble the regulatory community. In this latest reading, commissioners only give their regional transmission system a “6” rating on a 0 (inadequate) to 10 (fully adequate) scale. Regulators in the West, Midwest and “choice” states register even lower scores.

Reflecting the realities of a “wired” national economy, with homes and businesses more dependent on sensitive electronic equipment, commissioners also reported growing unease with power reliability and outage issues. Half of the respondents indicated that they are now monitoring outages and power quality incidents, despite the costs and complexity of gathering such data.

“This new report captures a major shift in regulatory priorities, which now includes, unlike the earlier surveys, an enhanced appreciation for the importance of maintaining strong utility financial profiles,” said Richard W. Cortright, Jr., director of S&P’s Utilities, Energy & Project Finance Group. “For instance, many regulators feel that they do not have the appropriate tools to significantly insulate utilities from the business pursuits of their parents or affiliates.”

Energy legislation passed by the U.S. Senate last month would prevent FERC from issuing a final SMD rule until July 1, 2005.

But state utility commissioners from Pennsylvania, Michigan and Maine on Thursday urged Congress not delay implementation of SMD.

“If Congress postpones FERC’s upcoming rules and stalls improvements to America’s wholesale power markets, we could see adverse impacts in states like Maine and Pennsylvania — threatening investment in capital markets, preventing the economic recovery of our energy sectors and leading to more of the economic uncertainty currently challenging our states,” said Maine Public Utilities Commissioner William M. Nugent.

Nugent said that the SMD white paper shows FERC’s willingness to listen to all parties and recognize regional differences. “We believe this dialogue and cooperation should continue so we can create well-designed and effectively monitored power markets for consumers nationwide.”

Pennsylvania Public Utility Commission Chairman Glen R. Thomas said that delaying SMD “will prevent families and businesses in our states and across the country from enjoying the benefits of more dynamic wholesale power markets, including enhanced reliability, substantial savings, new technologies and more choices.”

“More now than ever, Congress needs to recognize the numerous states that are moving forward to contribute to both their own states’ needs and the improvement of the national economy,” said Michigan Public Service Commission Chairman Laura Chappelle. “We call on Congress to support FERC’s work on creating a dynamic wholesale electric power market.”

FERC on Thursday said that it has scheduled two regional technical conferences following up on the SMD white paper that will take place on May 20 in Boston and on June 11 in Omaha, NE.

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