Energy officials last Tuesday said federal regulators still face a number of challenges in their effort to achieve a competitive wholesale electricity market. Some went as far as to say that competition in the bulk power markets has been a failed experiment, and called for a possible return to more regulation. But others weren’t as quick to admit defeat, pointing to the improvements in the power market that have been made over the last decade.

“I’m not here today to say that the markets have failed…I just don’t believe that the truly competitive markets have been fully developed,” said Glenn English, a former congressman and CEO of the National Rural Electric Cooperative Association (NRECA), at the first in a series of FERC conferences examining the state of competition in wholesale power markets. “We haven’t reached the promised land yet.”

Linda Stuntz, former deputy energy secretary and a partner in the Washington, DC-based law firm of Stuntz, Davis & Staffier PC, said the Energy Policy Act of 1992, which promoted competitive bulk power markets, and FERC’s electric restructuring order (Order 888) have produced mixed results in the market.

As for what has gone right, “it has produced benefits for consumers,” she said. “The vast majority of generation constructed since 1990…has been constructed by nonutility generators. They and their shareholders and lenders have borne the risk of missed demand estimates, missed projections of fuel prices that utility ratepayers bore before the 1990s…Those risks are not trivial,” she noted. In addition, competitive wholesale markets have spurred greater productivity and efficiency in the generation of electricity.

But policymakers, in crafting legislation and regulation in the 1990s on electric markets, totally missed the mark on natural gas supply and prices, according to Stuntz. The mindset at that time was that there was “almost an inexhaustible supply of natural gas available at $3/Mcf or less. Well, that appears to be wrong,” she said.

Stuntz noted that fully 50% of the natural gas being produced in the United States today is from wells that have been drilled in the last three years. “Even with the tremendous amount of drilling activity that has been elicited by the high natural gas prices, we are barely able to keep production constant,” while gas imports from Canada are declining. She said this should guide policymakers’ decisions about fuels for the generation of electricity.

Policymakers also wrongly assumed that their actions would spur new investment in transmission facilities, similar to what was going on with natural gas pipelines at the time, Stuntz said. But she noted that a number of factors — the difficulty of siting new transmission, the challenge of transmission rate design and the role of the states in regulating transmission rates — have caused investments not to materialize.

Given the volatility of natural gas prices, she called on the Federal Energy Regulatory Commission to consider whether single-priced auctions for electricity are appropriate. Stuntz also said she believed that FERC needs to exercise its rate authority over transmission in interstate commerce, for the transmission component of bundled retail sales. Lastly, she urged the Commission to explore with states and large consumers mechanisms to encourage long-term contracts and provide market certainty to enable investment in new resources.

John Anderson, president and CEO of the Electricity Consumers Resource Counsel (ELCON), was the most critical of all the panelists, saying he didn’t believe that true competition had arrived in the wholesale electricity markets.

“We believed real competition would produce innovations, improve customer services and [result in the] so-called killer products that everyone wants. But the defenders of these markets today can’t show us those things because they don’t exist,” he told FERC Chairman Joseph Kelliher and the Commissioners.

“We expected a competitive market in which end-use customers would both compete head-to-head with generators to establish market clearing prices and [would be] paid compensation equivalent to those generators when load is reduced. Unfortunately, this simply hasn’t happened,” said Anderson on behalf of large industrial energy consumers.

Secondly, ELCON expected a competitive market to stimulate new investments, he noted. “There’s an enormous amount of capital seeking new investment. But investment in generation has all but ceased in the organized market, and investment in transmission is not far behind.”

In addition, ELCON anticipated that many new players would enter a competitive market and some inefficient players would exit, Anderson said. But “this didn’t happen to a large extent…Unfortunately, many of those that have bailed out lately have been the new players, not the old. The result is the old monopoly.”

The industrial energy group also envisioned a market in which both suppliers and consumers would hedge commodity price volatility with long-term bilateral contracts. “This robust liquid, forward [market] created with these contracts would provide investors the same or better security as traditional utility rate base. But it hasn’t happened either,” Anderson said.

“We were early advocates of ISOs and the separation of operation from ownership of transmission. We [hoped] that the congestion costs combined with the transparent, open-access operation of the grid by an impartial air traffic controller would spur new investment. And this hasn’t happened either,” he noted.

Moreover, “we expected that industry restructuring would mitigate market power that would allow us to hopefully address underregulation. This might have been accomplished if the first five previous conditions…had been implemented. But it hasn’t happened either. And market power, to us at least, is an even bigger problem as generators get bigger.” Finally, “we expected wholesale price caps and bid mitigation measures could be relaxed,” Anderson said.

He urged FERC to acknowledge that locational marginal pricing (LMP) is not working for the benefit of end-use customers. “LMP is not robust enough to compensate for the lack of adequate infrastructure, and should never have been implemented without additional transmission and the elimination of major load pockets,” Anderson noted.

He also called on the Commission to begin an inquiry into whether the current regional transmission organization (RTO) platform with LMP can be made a viable market model and supported by consumers. The inquiry should lead to a “new roadmap for either reforming [the] RTO-LMP format or considering a return to regulation.”

Most important, “FERC should acknowledge the magnitude of the problem and realize that simple technical fixes or additional regulatory intervention will not correct the inherent problem. FERC must be ready to substantially change the basic underlying structure and implement tariffs that provide customers just and reasonable rates,” Anderson said.

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