Is it competition yet?

The Energy Policy Act of 1992 was designed to foster wholesale competition in the US electric industry, and to a large degree it has succeeded. Ownership of electric generation by non-utilities has been steadily increasing, a trend expected to continue. By the end of 1998, non-utilities owned 12 per cent of generating capacity due to a combination of capacity additions, retirements and sales of generating capacity, according to the US Energy Information Administration. Non-utilities generated 407 billion kWh in 1998 compared to 3212 billion kWh generated by utilities. Non-utility generators have contributed more than half of all new investment in electricity generation since 1990. The Edison Electric Institute (EEI) estimates that consumers are saving between $3.5 billion and $5 billion per year in electric costs as a result.

Despite these gains, the transition to a competitive market is not complete. “Ultimately, in order for EPAct’s goals to be truly realised, we will need to guarantee comparable treatment for all users of the interstate transmission system, as well as the necessary creation of enough retail competition nationwide to ensure vibrant wholesale trading,” says Lynne Church, executive director of the Electric Power Supply Association. “If we are unable to finish the job that EPAct started, we may actually be looking at setbacks for both the industry as a whole and our customers.”

The Federal Energy Regulatory Commission has moved vigorously to open the nation’s transmission grid to competitors. Order 888, issued in April 1996, required that all utilities subject to its jurisdiction provide open access to transmission facilities and established principles for an Independent System Operator (ISO) to provide transmission services for transmission owners in a particular region. Order 889 required transmission owners to establish electronic bulletin boards to share information about available transmission capacity.

The impact of these orders has been mixed. Some regions have already established successful ISOs, notably California, New England, New York and the PJM (Pennsylvania-New Jersey-Maryland) area. The situation in the midwest remains more fragmented. In other areas, such as the southeast, there has been very little ISO activity.

In May 1999, FERC, concerned that there are still impediments to a fully competitive market, issued a Notice of Proposed Rulemaking (NOPR) for Regional Transmission Organizations (RTOs). It proposes establishing regulations to encourage transmission owners to voluntarily transfer control and/or ownership of their facilities to an RTO. FERC believes that RTOs would increase efficiency in managing the transmission grid, improve transmission system reliability and reduce discrimination.

But there is a diversity of viewpoint as to how RTOs should be structured and what FERC’s role should be. EEI supports the voluntary approach and emphasizes pricing reforms as the preferred method for encouraging participation and promoting improvements to the transmission system.

The National Association of Regulatory Utility Commissioners (NARUC), while generally in agreement with FERC’s goals, understandably takes the position that FERC should defer to regional approaches that are endorsed by state regulators and should grandfather existing FERC-accepted ISOs.

EPSA supports a transmission system that operates independently of the marketplace, with a mechanism to address market power abuses. While recognizing that state regulators have a role to play, EPSA says that consistent federal regulation is needed to ensure workable competitive bulk power markets, with FERC ensuring that national policies are met.

Promising developments

The Electricity Competition and Reliability Act, a promising restructuring bill introduced into the House of Representatives by Commerce Committee Chair Tom Bliley (R-VA) and Energy and Power Subcommittee Chair Joe Barton (R-TX), could resolve these issues. The subcommittee has held hearings on the bill and could send it to the full committee early next year. The third draft of the legislation encourages transmission utilities to establish or join RTOs, directs FERC to approve RTOs that meet certain standards and bars FERC from imposing a specific structure on RTOs. The bill also allows FERC to order a utility to expand its transmission facilities at the request of another utility.

The proposed legislation gives FERC additional authority over utility mergers, authorizes it to approve an organization to establish enforceable reliability standards, gives it additional means of addressing market power issues, removes barriers to competition in the Public Utility Holding Company Act (PUHCA), prospectively repeals mandatory purchase obligations under the Public Utility Regulatory Policies Act (PURPA), provides consumer protections and provides for FERC regulation of federal transmission systems.

There appears to be significant bipartisan agreement among congressional leaders and the Administration on these issues as well as a growing consensus among stakeholders. “We are closer than ever before to achieving a comprehensive restructuring measure that will go a long way toward achieving many of EPAct’s goals,” EPSA’s Church says.

A cynic would say that a Congress whose partisans seem to spend most of their time positioning themselves for the next election rather than addressing important issues in a meaningful way is not likely to come together on energy policy. But energy policy is not now the political controversy that it was in the early ’90s – the disagreements are over details and implementation, not major philosophical issues – and the changes that have occurred since 1992 are encouraging to many.

A cynic would bet against passage of a bill next year, but a cynic just could be wrong.

Patricia Lloyd Williams is a freelance writer based in the Washington DC metropolitan area

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