Pro-Market Group Warns States Of Repeating Past Regulatory 'Mistake'

Pro-Market Group Warns States Of Repeating Past Regulatory 'Mistake'
By Will Harrington
Energy Washington Week
Issued Dated December 17, 2008

A large pro-wholesale market coalition is trying to fend off a growing number of state-level "attacks" on competitive electricity markets with a new report that argues cost-of-service regulation prevalent in the 1970s was a massive mistake that led to inefficient power plant management and excessive cost overruns.

The coalition's argument that a move toward regulated service being promoted in a number of states will result in problems that cost consumers $200 billion in the 1970s and 1980s is the latest in a continuing battle over electricity system restructuring. FERC and the RTOs say wholesale markets are working well, but critics say they are producing exorbitant costs to electricity consumers and are pressing FERC and now Congress to take action that would curb markets. States are also joining in the debate.

On Dec. 8, the COMPETE Coalition -- comprising electricity suppliers, consumers, trade associations, and others who support centralized wholesale electricity markets -- released "Embrace Electric Competition or It's Deja Vu All Over Again," written by Frank Huntowski, Neil Fisher, and Aaron Patterson of the North Bridge Group. While the COMPETE Coalition includes many diverse members, Reliant Energy -- the major independent power producer and COMPETE member -- funded the report.

The report comes as many states around the nation are moving back toward cost of service regulation and away from competitive markets because they contend that the markets give generators big profits while leaving consumers to foot high bills with few benefits to show for them. The COMPETE Coalition counters that these cost increases are not due to market structure but rather to higher construction, material, and fuel costs, particularly the cost of natural gas.

The report argues that in many ways the U.S. faces similar electricity challenges to those of the 1970s: spikes in fuel costs, increases in the cost of capital, environmental problems, and changes in consumer demand. Regulation, the report says, failed to address these challenges in an effective and efficient way.

Regulators miscalculated key market conditions like the projected growth of electricity demand, the future cost of natural gas, and the cost of construction, leading to an overbuild of baseload capacity and unnecessarily high rates. The effects of these poor calculations, the report argues, were exacerbated by a clumsy and slow regulatory response to the changing conditions.

Rather than cancel uneconomic nuclear and coal plants that were in the early stages of construction, for example, regulated utilities stuck to the plans, assured that the costs could be recouped in rates. But the result was low capacity utilization and unnecessarily high rates.

"The industry's response to these external shocks was heavily influenced by the flaws inherent in a cost-of-service regulation regime, and ultimately led to higher costs for consumers and less efficient resource allocation than likely would have occurred in a competitive framework," the report reads. Because organized markets send clear price signals to suppliers and because suppliers bear the risk of investment, the report argues that markets are the best frameworks to promote sound and efficient investment.

The prospects of climate change legislation, and uncertainty about the future price of carbon credits, adds additional impetus for relying on a competitive process for securing additional supply, the authors argue. An entrepreneur can react more quickly to the high prices that result from a carbon price, according to Huntowski, in a question and answer session on the report. "All of that uncertainty is something that regulation has not managed well," he said. Competitive environments, on the other hand, allow for "a faster response to changing conditions."

Huntowski said "competition is under attack" in many states around the country, and that the report was conducted to inform stakeholders that there is a significant danger in reverting to regulation.

He cites legislative attempts in Maryland, Virginia, California, Michigan and other states to take incremental steps back toward regulation if not reverting entirely to regulation. For example, he cited policy in California requiring that regulators direct utilities to enter into 30-year contracts with new units. Although he conceded that the suppliers could compete for those contracts, he said it is a "incremental step" toward regulation, as the regulators are deciding when new supply is built rather than letting market signals drive the investment.

Another move to roll back competition, he says, was Virginia's 2007 law to re-regulate the electric industry, which limited the ability of most consumers to buy electricity from competing suppliers.

Nick Braden, a spokesperson for American Public Power Association (APPA), which is outspoken in its criticism of wholesale markets, told EnergyWashington the report appears to be "more of the same" coming from the COMPETE Coalition. While acknowledging that APPA had not delved into the details of the report, Braden argues COMPETE is "spending a lot of effort" defending the markets, and notes that the Government Accountability Office has said FERC has been unable to demonstrate that the markets bring any benefits to consumers because it doesn't collect sufficient information.

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