Andersen Warns Of Increased State/Federal Tensions

Friction is likely to increase between state and federal regulators on the issue of deregulation if states begin to block retail competition because of the crisis in California, according a new report issued last week by Andersen Consulting. The report, "Energy Crisis in the Western United States: Lessons for Navigating Regulatory and Market Minefields," was unveiled by Andersen's North American Energy Consulting Practice at a Washington, D.C. briefing.

David Jermain, principal with Andersen's North American Energy Consulting Practice, noted that the report identifies eight overriding implications emanating from the western energy crisis. "These aspects of the California virus will shape the longer-term operations of the western grid, the regional and national economy, domestic energy policy and the industry's evolution," he said.

The eight implications singled out in the Andersen report are:

  • Increased deregulation uncertainty and risk
  • Reduced investor confidence
  • Contributing factor in economic softening
  • Increased pressure on the Western grid
  • Unbundling failures that push companies back to portfolio strategies
  • Ineffectiveness in changing siting and development restrictions
  • Procurement management that alters user-utility negotiating leverage; and
  • Increased emphasis on distributed generation and new technologies

But perhaps the most important and potentially the most dangerous outcome is the impact on state and federal relations. "Tensions and differences between state and federal regulators raise the specter of repeating the regulatory and political conundrum California's investor-owned utilities have been facing," Jermain said. If federal initiatives open wholesale markets while retail markets remain regulated, a crucial question emerges, namely whether state regulators will pass-through higher wholesale costs if they should occur.

As to the California situation creating increased pressure on the Western grid, Jermain noted that "Even as capacity increases and demand reductions work to resolve the California crisis, these solutions have long-term implications for the Western grid." Such implications include a realistic chance that California could become an "energy island" as a result of near-term reduction in available regional resources for export to California, according to the Andersen report. Also, there could be increased emphasis on security control to protect against overall Western grid failure as sub-regions have difficulties.

Along with the report, Andersen also issued the results of a survey of senior executives from 16 non-California utilities detailing their views of the implications of the California power crisis for their companies and the industry. The survey was conducted between Feb. 19 and March 2 by Knowledge Systems & Research Inc. of Syracuse.

On the deregulation front, nearly all the executives surveyed said they believe recent California events will slow the pace of deregulation over the next five years for states that have not begun or finished writing restructuring legislation. None believe that it will result in advanced states deciding to re-regulate markets, although many states will review their legislation to assess the risk of duplicating California's current situation and make any changes necessary to avoid it.

As to legislation at the federal level, the survey found that few executives suggest that the California situation will spark national energy policy/legislation. Other executives believe that it will be a continuing issue but, because of state-to-state variances, Congress will be unable to pass any comprehensive measures or force states to a restructuring timeline.

Turning to company strategies, most of the executives surveyed do not see any changes to their business models or strategies for generation, distribution or supply procurement as a response to the situation in California. However, many have, among other things, expanded their risk management programs, reduced spot market purchases and started emphasizing long-term supply contracts. Those executives facing price caps are rethinking their stance on them, according to the Andersen survey.

The full Andersen report on the western energy crisis can be downloaded at www.andersen.com.

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