Unless independent system operators in the Northeast are able to correct design flaws and lower market barriers, there is a very large risk that high and volatile wholesale electric prices will occur in that part of the country over the next two summers, especially if this summer turns out to be unusually hot, according to a recent report issued by Xenergy Inc.

Xenergy’s report is part of a joint study of the U.S. wholesale electricity markets that also includes a report by EFI. Xenergy is an energy services and consulting firm, while EFI is a national marketing and management consulting firm that specializes in the environmental and energy sectors.

In its report, Xenergy said that interviews with electric retailers, as well as an extensive review of reports and regulatory documents, have revealed that all three of the Northeastern ISOs — New England, New York and PJM — face serious problems in their energy, capacity and ancillary service markets. These problems, according to the study, include energy price spikes, high installed capacity/capability prices and administrative charges and high ancillary service prices and charges. Also, the Northeastern ISOs are grappling with frequent import and export curtailments and constraints, internal transmission congestion and generation capacity constraints, according to the study.

The study goes on to say that the likelihood the Northeastern ISOs can correct their “design flaws” and reduce market barriers are remote for this year and several years forward. Therefore, the study continued, there is a “great danger” of high and volatile wholesale prices in the Northeastern markets over the next two summers. “This is especially true if the summer of 2001 is an unusually hot one, or even slightly warmer than normal,” the study went on to say. Also, Xenergy said that the “pervasive and persistent market flaws put the very success of competitive restructuring at risk.”

For its part, EFI said in its 2001 U.S. regional transmission organization (RTO) study that while it is “highly unlikely” that the Federal Energy Regulatory Commission will issue any order as significant as Orders 888, 889 or 2000, this year will be anything but stagnant for the electric utility industry. EFI noted that changes will be made in the composition of FERC, the RTO proposals already on the table, and the RTOs that are still largely in formation. “The new administration will also impact the way FERC does its job, including the decisions it makes with regard to the RTO compliance filings,” EFI added.

With respect to the electricity industry’s direction, EFI predicts that there will be a continuing push for larger, more inclusive, more flexible organizations coordinating member transmission operators. Also, changes will likely be made to facilitate the inclusion of public power authorities, according to EFI, while for-profit transcos will function as components of many independently operated RTOs. In addition, EFI believes that incentive pricing mechanisms, now proposed for only a few transmission entities, will become more sophisticated and widespread. Furthermore, EFI said that pricing schemes in some of the ongoing proposals will be complex in order to address the cost shifting and other concerns of diverse stakeholder interests. Over the long term, the goal of these developing RTOs will be to adopt simpler pricing schemes, the EFI report adds.

As for the California situation, EFI asserted that the single most important effect of the state’s crisis is that it could increase public wariness about electricity restructuring. “Over the next year, the pitch of debate over restructuring will be heightened as pro-restructuring forces attempt to counteract their opponents by implementing public awareness campaigns,” EFI’s report stated. Even those who support restructuring in general, EFI continued, will become more entrenched in how restructuring should happen.

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