The disparity of U.S. regional wholesale power markets makes it “difficult” to evaluate the degree to which more competition has influenced consumption and investment decisions in generation and transmission, a federal task force said in its final report to Congress last Thursday. It further found that retail power competition has yielded disappointing results.

“The task force examined whether competition has elicited the consumption and investment decisions generally associated with competitive wholesale markets. The task force found this question challenging to address due to a number of complicating factors. The various U.S. regional wholesale electric power markets [have] developed differently since the introduction of widespread wholesale competition,” said the 191-page report.

“There were significant regional regulatory and structural differences in the electric power industry when Congress enacted [the Energy Policy Act of] 1992 and when FERC adopted Order 888 in 1996. Even today, the regional markets have different features and characteristics,” said the task force, which was comprised of members of the Department of Justice, Federal Energy Regulatory Commission, Federal Trade Commission, Department of Energy and Department of Agriculture.

“These differences make it difficult to identify and separate the determinants driving consumption and investment decisions” in the generation and transmission markets, and the impact that competitive markets are having on these decisions, the final task force report concluded.

Congress created the task force under the Energy Policy Act of 2005, and charged it with the responsibility of studying competition in the wholesale and retail electricity markets. The task force submitted a draft final report to Congress in June 2006, and sought comments on the report’s preliminary observations. The final report includes the comments and other input.

The key question confronting the task force was whether competition in wholesale markets has resulted in sufficient generation supply and transmission to provide wholesale customers with the kind of choice that generally is associated with competitive markets. “Despite the difficulty of directly answering the question at hand, the task force’s examination of wholesale competition did yield useful observations,” the report said.

“One approach to competition in wholesale markets is to base trades exclusively on bilateral sales negotiated between suppliers and scheduled through individual, nonregionalized transmission owners. This approach predominates in the Northwest and Southeast,” the report said. In these types of markets, “prices and terms are more transaction-specific and, for some time frames, less publicly available than in organized markets, which may result in less efficient generation dispatch. It can be difficult for system operators to coordinate transmission efficiently in these systems, as congestion costs and impacts are not readily apparent,” it noted.

“In some of these markets, wholesale customers have difficulty gaining unqualified access to the transmission needed to access competitively priced generation, thus limiting their ability to shop for least-cost supply options.”

However, the regional transmission organization (RTO) market designs, which are seen mostly in the Northeast, Mid-Atlantic, Midwest, Texas and California, “provide participants with guaranteed physical access to the transmission system (subject to transmission security constraints),” the report said. “This more open access to transmission can increase competitive options for wholesale customers and suppliers as compared to most bilateral markets.”

And the “price transparency in these regional organized markets can increase the efficiency of the trading process for sellers and buyers and can give clear price signals indicating the best place and time to build new generation,” the task force said.

“Concerns have been raised, however, about the inability to obtain long-term transmission access at predictable prices in these markets and the impact that this can have on access to competing suppliers and incentives to construct new generation. Some customers have raised concerns about high and sometimes volatile commodity price levels in these markets,” the report noted.

In the generation market, “new…investment has varied significantly by region since the adoption of open-access transmission and the growth of competition,” the task force reported. The report cited a number of issues affecting the investment decisions of both buyers and sellers in wholesale markets. “One was the difficulty of raising capital to build facilities whose revenue streams are affected by changing fuel prices, demand fluctuations and the potential for regulatory intervention. A related theme was the investment dampening effects of a perceived lack of long-term contracting options for generation and transmission,” the report noted.

“Both generators and wholesale customers cited long-term contracts as critical in obtaining financing for new generation and ensuring adequate supplies for retail loads at predictable prices,” but commenters offered several reasons for a perceived lack of long-term contracting opportunities, the task force said.

“First, short-term market conditions, particularly in organized markets with uniform price auctions, may be affecting the availability, pricing and terms for long-term power suppliers under bilateral contracts…Second, generators and marketers may be unwilling to enter into long-term supply contracts because of limited opportunities to hedge the potential risks of long-term commitments in highly volatile electricity markets. Third, both generators and customers cited continuing uncertainties over availability and uncertainty of long-term delivery options (transmission). Fourth, long-term contracts may be difficult to arrange because of inherent uncertainties associated with federal and state regulation of these contracts. Finally, the uncertainty that distribution utilities face over how much supply they will need to procure for customers that have an option to switch can also discourage utilities from signing long-term contracts,” the report noted.

“The availability of transmission is often key in determining whether a generating facility is likely to be profitable and thus elicit investment. Despite legislative and regulatory efforts to expand transmission access for competitive generation and to reduce the potential for discrimination, the perception of discrimination persists. Commenters reported that such discrimination can increase delivery risk because purchasers fear their transmission transactions could be terminated for anticompetitive reasons,” the task force said.

The report also addressed several ways to promote entry of new generation. “One possible, but controversial, way to spur entry is to allow wholesale price spikes when supply is short. The profits realized during these price spikes can provide incentives for generators to invest in new capacity. However, if wholesale customers have not hedged (or cannot hedge) against price spikes, then these spikes can lead to adverse customer reactions. Unfortunately, it can be difficult to distinguish high prices due to the exercise of market power from those due to genuine scarcity,” it said.

“Expanding transmission capacity may encourage entry of new generation and/or the more efficient use of existing generation. However, transmission owners may resist building transmission facilities if they also own generation and if the proposed upgrades would increase competition in their sheltered markets. Another challenge is that it is often difficult to assess the beneficiaries of transmission upgrades, who should pay for the upgrades and how regulators should provide for recovery of the investment through rates,” the report noted.

As for retail market competition, 16 states and the District of Columbia by 2006 had restructured retail service and allowed competitive suppliers to provide service to some, if not all, retail customers at prices set in the market. “In most profiled states, retail competition has not developed as expected for all customer classes. Few residential customers have switched to alternative providers (exceptions include Massachusetts, New York and Texas). In most of the profiled states, few residential customers have a wide variety of alternative suppliers and pricing options,” the task force said.

“Commercial and industrial customers have more choices and options, but in several states large industrial customers have become increasingly dissatisfied with retail market prices. To the extent that multiple supplier serve retail customers, prices have not decreased as expected, and the range of new options and services is often limited.”

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