An Rx for Competition

by Richard McMahon, EEI

The nation’s wholesale electricity markets- bilateral and organized-create the potential for lower costs, more efficient use of resources, and enhanced reliability. Each competitive model offers its benefits, but each also faces a wide range of challenges that keep it from achieving its full potential.

We offer our own three-step pre-scription for improving competition. These measures will create the framework that will enable both models to achieve their goals.

Step 1: Strengthen the grid

A strong grid is essential for both reliable electricity service and virbrant competition in the wholesale markets. To keep up with the country’s growing demand for electricity, projected to increase by 40 percent by 2030, the industry has already begun investing. Looking ahead to 2009, EEI’s data indicate that the industry is planning to invest $31.5 billion in the transmission system, an increase of nearly 60 percent from the amount invested from 2002 to 2005. Based on these investment numbers, NERC projects that almost 13,000 miles of new transmission (230 kV and above) will be added by 2015, an increase of about 6 percent.

To ensure that this new infrastructure is built, we are urging FERC to address transmission pricing and construction incentives. We are also encouraging FERC to adopt incentive rules that do not favor one corporate structure or business model over another. Many different structures and business models can coexist in a competitive wholesale marketplace.

Congress should also permanently extend the lower tax on corporate dividends. This will attract capital for these electric infrastructure investments. Achieving a long-term or permanent extension of the dividend tax rate reduction is crucial for our investors because the industry pays out a higher percentage of its earnings to shareholders than any other business sector.

Extending the production tax credit for renewable energy sources for 5 years will attract capital as well. The current PTC is due to expire on Dec. 31, 2008. In the past, the short-term, start-and-stop nature of the tax credit dissuaded utilities, developers, manufacturers and investors from maximizing the vast potential of renewable technologies.

We are also promoting several energy efficiency-related tax initiatives. These include incentives for plug-in hybrid electric vehicles and shorter depreciable lives for “smart meters” and other electric distribution assets to ensure that we use energy wisely.

Step 2: Apply rules consistently

Regional differences exist in regulatory structures, fuel mixes, environmental concerns, economic growth, and many other areas, but irrespective of these differences, regulatory certainty is needed. EEI’s member electric utilities have come together to advocate some broad principles that we believe will achieve this regulatory certainty and make the U.S. wholesale electricity markets more competitive. Fair and open access to the transmission grid is key among them.

We commend FERC for its Order 890 that recognizes the importance of standardizing and exchanging data for calculating how much transmission capacity is available, both for planning and for real time. Order 890 will improve reliability, promote the provision of service to native load customers, increase market efficiencies by releasing transmission capacity to other customers, and will promote the rational expansion of the transmission grid.

The issue of market power also affects competition. Effective market monitoring, enforcement, and consumer protections should be in place for competitive wholesale markets. Under the Federal Power Act, it is FERC’s responsibility to prevent the exercise of market power in competitive markets and to develop the rules for such markets. Market monitors should be independent of market participants and transmission operations management and should have the authority to report directly to FERC.

Any analysis of market power in the wholesale markets should also take into account existing commitments and obligations under state law and state policies relating to service obligations, resource procurement, resource adequacy, and the environmental aspects of generating electricity.

Regional market structures should provide accurate price signals to promote efficient investment and ensure that generating resources are available over the long term. These provisions should reflect the regulatory and market structures adopted by states within a region. In competitive markets, this may require market mechanisms to ensure long-term resource adequacy.

We also strongly believe that negotiated, bilateral contracts are a foundation of wholesale electricity markets. The recent decision in the U.S. Ninth Circuit involving the “public interest standard” creates concerns and we encourage the Commission to take steps to promote contract sanctity.

Step 3: Develop a strong federal-state partnership

The states have the responsibility to site transmission, but the hybrid nature of the electric power industry today-with some regions operating in a competitive environment, and some in a regulated one-underscores the need for the states to consider regional and even national needs and benefits. Even though FERC now has “backstop” siting authority, an effective state-federal working relationship is more important than ever. The recent decision by FERC and the National Association of Regulatory Utility Commissioners to resume a collaborative joint dialogue on cross-jurisdictional issues related to competitive power procurement is a big step in this direction.

The nation’s electricity markets are evolving. And they are experiencing growing pains. But with the support of a strong grid, the application of equitable rules, and the leadership of a federal-state partnership, they will come through just fine. .

An Electric Choice Report Card

Policymakers in 21 states reformed their electric industries to give small businesses the power to choose electricity providers, but not all of those states have fully extended the benefits of choice to small businesses, according to Liberty Power, an independent energy retailer.

A National Federation of Independent Business survey found that electricity costs consistently rank as a top concern of small business owners but Liberty Power says burdensome rules or complex pricing make it hard for small businesses to shop for power-small business owners are too busy helping customers and ringing the cash register to devote hours to trying to interpret nontransparent utility prices.

Liberty Power created its “Electric Choice Report Card” for small and mid-sized businesses to help business owners understand the electric choice options in their states. States included in the report card were graded on the ability to compare prices, restrictions on shopping, protections from cost overruns and regulatory climate. The report card finds that Texas and New York lead the nation in creating rules that foster robust choices and make choice simple, and that shopping among electric customers is highest in these two states.

Liberty Power is currently licensed to sell power in 14 states.

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