The benefits of deregulating the electric power industry may be”deferred” — or may not be realized at all — if monopolyutilities are left unchecked to exercise market power in arestructured marketplace, according to an FTC staff report.

The report, titled “Competition and Consumer ProtectionPerspectives on Energy Power Regulation Reform,” outlined theagency’s four principles for effective restructuring of electricmarkets: 1) eliminating horizontal market power; 2) removingincentives for vertically integrated utilities to engage in “unduediscrimination and cross-subsidization;” 3) providing “accurate,non-deceptive information” to customers on price and serviceofferings; and 4) advocating “uniform disclosure” of prices and”other relevant attributes” of offers to customers.

The staff agency report, which was issued last week, recommendsan “analytical framework” for federal and state policymakers toadopt to ensure that consumers and businesses will benefit fromderegulation of electric markets.

Concerns involving horizontal market power “focus on thepossibility that one or a few generating [utilities] might obtainand be able to exploit market dominance in areas of the countrywhere transmission congestion occasionally creates restrictedgeographic markets for electric energy,” the report noted. Giventhat the FTC’s antitrust authority is limited to restrict marketpower, “tools to identify and remedy horizontal market power ingeneration are critical to increased competition in electric powermarkets,” it said. Horizontal market power refers to a utility’s orgroup of utilities’ ability to raise prices above the competitivelevel for an extended period.

Vertically integrated utilities, even if their generation isfunctionally unbundled from transmission assets, have a “continuingopportunity to engage in undue discrimination” by denyingcompetitors access to their transmission facilities, and bycross-subsidizing their power marketing affiliates, the FTC staffsaid.

As a remedy to vertical market power, the FTC staff proposed acompromise between complete divestiture of transmission andgeneration assets on one hand, and functional unbundling on theother. The latter would allow utilities to retain ownership andcontrol of their transmission and generation assets, but wouldrequire them to provide open access and comparable treatment tocompetitors.

Functional unbundling, which is basically what exists in thebulk power market now, “would be particularly difficult to monitorand enforce in this industry because, to succeed, the rules mustconstrain transmission owners to ignore their economic interests,”the staff report said. And while “complete divestiture wouldresolve the competition problem better” than functional unbundling,it “may sacrifice economies of scope between the regulated andunregulated markets,” according to the FTC.

“Because functional unbundling alone may not be effective, andboth it and complete divestiture may be more costly to implement, amiddle-way “operational unbundling” approach should be favorablyconsidered. By operational unbundling, we mean structuralinstitutional arrangements, short of divestiture, that wouldseparate operation of the transmission grid and access to it from[the] economic interests in generation,” the report noted.

“By separating ownership from control, operational unbundlingcaptures a primary advantage of divestiture by affording a highlevel of assurance — at least as high as functional unbundling,if not higher — that nondiscriminatory practices and rates willprevail.” Also, operational unbundling would eliminate regulators’costs of enforcing behavioral rules because utilities would have”less incentive and ability” to discriminate, the FTC staff said.An example of operational unbundling is regional transmissionorganizations (RTOs).

But this may not be a cure-all. “Although operational unbundlingor divestiture minimizes the likelihood of discriminatory access totransmission, there are less direct ways in which anticompetitiveinfluence can be used to foster discrimination. Important antitrustcases have been decided where indirect pressure or influence hasbeen applied to advance common ownership interests againststructurally independent firms. We invite FERC to be alert to thistype of anticompetitive behavior as well,” the agency staff said.

Distributed generation (DG) is fast becoming the target ofutility anticompetitive practices, the report pointed out.”DG…..faces potential discrimination in connecting to the gridfrom vertically integrated, incumbent suppliers in light of DG’spotential to increase competition in generation, transmission anddistribution.”

In order for DG to reach its full potential, the FTC staffbelieves states may have to administer fair market tests that wouldinclude technical interconnection rules to determine whether a DGfacility qualifies to connect to the transmission and distribution(T&D) system. This would be preferable to leaving the decisionof a DG interconnection up to the “discretion of incumbentgeneration and T&D suppliers,” the report noted.

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