Re-Regulation is not the Solution to High Prices

Issue 5 and Volume 85.

by Larry F. Eisenstat

A stable regulatory environment is critical to the development of energy infrastructure in deregulated markets. Only regulatory stability will deliver the full benefits of wholesale and retail competition to customers. The very prospect of turning the clock back to the days of monopoly-provided electric service will only put investors increasingly on edge, and the greater this uncertainty, the harder it will be for anyone confidently to move forward to build generation and other infrastructure projects.

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Where deregulation already exists, in order to minimize retail electricity prices, states should not re-regulate and impose new barriers to entry, but rather should strengthen and/or create policies that already have been shown to lead to lower prices, most particularly competitive procurement practices that remove existing barriers to constructing non-utility generation. The evidence shows overwhelmingly that competitive procurement benefits consumers considerably more than non-competitive systems. Another hugely important, although much less recognized, practice, comprehensive system planning incor-porates competitive solutions to solve system problems.

Although vastly better than a return to traditional regulation, the existing organized (i.e., unbundled and competitive) markets are not perfect, and will not by themselves ensure that all of a state’s different economic and environmental objectives will be satisfied in the best way possible. To increase this likelihood, state commissions should agree, in conjunction with those independent system operators already engaged in regional planning, to develop a truly comprehensive regional planning process that, while relying heavily on each state’s own resource planning efforts, would identify regional long- range needs and facilitate regional competitive solutions to supply-demand imbalances or other system problems. The regional plan would (1) identify the kinds and locations of infrastructure projects required to maintain and enhance the efficiency, reliability and adequacy of the power system, and (2) do so, wherever possible, by means of a competitive solicitation process seeking proposals on how best to address the identified need. Thus, the plan would consider not only economically efficient transmission projects, but generation and other resource adequacy initiatives as well, some of which might substitute directly for transmission, and even specific types of generation (such as wind) to the extent the state has set aside or otherwise expressed a policy preference for such generation.

A coordinated transmission and generation planning process is necessary to meet the needs of all users of the power grid (load serving entities, generators, suppliers, customers, etc.) and not simply to chronicle the amount of new transmission needed to accommodate those parties that require, or reasonably can be expected to require, long-term transmission service within the planning period. Rather, truly comprehensive planning should identify the congestion, reliability, or other system problems to be alleviated, and the resource requirements that likely will have to be met during the planning period as well. Once identified, the construction of those transmission or generation or conservation alternatives that would most economically satisfy such needs will be facilitated. An all-inclusive regional planning process would also assist load serving entities in procuring long-term power (i.e., longer than the terms in the existing capacity markets) and facilitate the development of clean capacity.

Finally, although the states should encourage regional transmission and generation planning, such planning still must start with the individual states, with the results provided as inputs to the regional planning process. It is each state’s responsibility to develop its own plan to ensure that there will be sufficient infrastructure to accommodate its future energy demands at a reasonable cost. To this end, distribution utilities should be directed by their respective state commissions first, to outline proposed upgrades to the transmission/distribution system in their areas over the next 15 years, including estimated costs and benefits, and second, to outline the amount and types of additional generation that likely will be required to satisfy load requirements over the same time period.


Larry F. Eisenstat is head of the energy practice at Dickstein Shapiro LLP. He can be reached at [email protected]