Future of US power industry investment climate depends on proposed energy legislation, CERA says

WASHINGTON, June 25, 2002 – The American electric power industry is at a critical juncture, Larry Makovich, senior director of Cambridge Energy Research Associates’ North American Energy Group, told the U.S. Senate Committee on Energy and Natural Resources Wednesday afternoon.

“Proposed energy legislation and pending Federal Energy Regulatory Commission rulings will help define the investment climate of the power business in the years to come,” Makovich testified.

Issues relating to the need for, and the barriers to, development of electricity infrastructure are central policy concerns, he said, because the generation, transmission and distribution infrastructure is critical to all sectors of the U.S. economy.

“A positive investment climate is essential for the success of power deregulation because the electric power industry is one of the most capital intensive sectors in the economy – electric infrastructure accounts for eight percent of U.S. business fixed assets.”

The current investment climate for electric power infrastructure is negative, and government policy is partly responsible, said Makovich.

“The U.S. electric industry is over five years into a muddled move from comprehensive regulation to the market. Today, only one third of electric generation infrastructure is unregulated, less than half of the retail power customers can choose electric suppliers, and wholesale power markets remain ill-defined with no standards for rules and institutions.”

In addition, energy companies have not responded to record new supply additions over the past several years with investment in transmission infrastructure. As a result, congestion and inefficiency are increasing in most regional transmission networks.

A U.S. Department of Energy National Transmission Grid Study posed more than 50 recommendations – “clear evidence that solutions to transmission investment gridlock are not simple because transmission networks are complex,” said Makovich.

Actions needed to promote investment in transmission infrastructure require Congress to:

* Establish limited eminent domain authority at FERC to facilitate investment in existing multi-state grids.

* Create authority to set mandatory reliability standards across regional transmission grids connecting diverse sets of electric market participants.

* Change laws to ensure publicly-owned transmission infrastructure can fully participate in regional transmission organizations.

Government action is also needed to improve the investment climate in electric generation.

“An investment retrenchment is roaring through the power industry,” Makovich told the Senate committee. “Cancellations and postponements of power plants under development in the United States have topped 81,921 megawatts since the start of the year – close to one third of proposed development. The region for development reversals is the West – a power system that has recently shown signs of supply and demand tightness again.”

FERC stands at a critical juncture, said Makovich. “Its pending ruling on standard market design will shape the future investment climate and is likely to determine the success or failure of U.S. power industry deregulation.”

CERA’s new study, “Energy Restructuring at a Crossroads: Creating Workable Competitive Power Markets,” lists twelve actions needed to create workable power markets and a positive investment climate in the sector:

* Define the bounds of wholesale power markets in alignment with the physical grids.

* Define wholesale power markets to achieve critical mass, thus ensuring competition.

* Expand the regional transmission organization mission to tightly integrate system operations and market operations.

* Create regional wholesale spot power markets.

* Create capacity markets.

* Adopt pricing mechanisms to manage transmission congestion.

* Stimulate appropriate transmission system planning and investment.

* Ensure market transparency through information disclosure.

* Rationalize energy infrastructure and development by setting siting and permitting targets in line with the infrastructure development needs.

* Coordinate wholesale and retail transactions by opening retail markets as quickly as possible once wholesale markets are functioning, but in phases to reduce stress on the system.

* Minimize distortions of market price signals – wholesale price caps should be phased out and retail rate freezes should be thawed.

* Connect demand to the market.

“Time is of the essence,” said Makovich. “The power infrastructure is too important to the U.S. economy to allow barriers to investment to cause continued deterioration in power systems operations.”

Cambridge Energy Research Associates is a advisor to major international companies, financial institutions and organizations, delivering strategic knowledge and independent analysis on energy markets, geopolitics, industry trends and strategy. CERA is headquartered in Cambridge, Mass., and has offices in Bangkok, Beijing, Calgary, Houston, Mexico City, Moscow, Oakland, Oslo, Paris, Sao Paolo, Seoul and Washington, D.C.

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