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Security tops deregulation as prime energy concern

By Patricia Lloyd Williams

On September 10, 2001, the issues surrounding competition and deregulation in US electricity markets seemed very important. By the time most people had their second cup of coffee on September 11, they seemed trivial.

Utilities have long been aware that their facilities offer an attractive target for terrorists who wish to disrupt daily life in the US. They have already implemented strong security measures to protect against both physical and electronic assault. Nevertheless, the unthinkable attacks on New York City and the Pentagon in Arlington, Virginia, brought a new reality to the situation.

Officials from the Department of Energy (DOE), Federal Energy Regulatory Commission (FERC), the Federal Bureau of Investigation (FBI) and even Federal Reserve Board chairman Alan Greenspan are urging utilities to provide additional protection to the electricity infrastructure. There is already increased security at nuclear power plants – ironically the only US generating facilities designed to withstand a plane crash – and the nation’s transmission system suddenly seems very, very vulnerable.

More security, of course, will not be cheap. On September 14, FERC issued a Statement of Policy to reassure companies under its jurisdiction that they would be able to recover costs for additional security, even if they are operating under frozen or indexed rates. State commissions will undoubtedly do the same.

What impact, if any, this will have on the restructuring debate is unclear. The markets are in a fragmented state of development. The situation in California last winter and spring put the brakes on restructuring efforts in many states. The September 20 vote by the California Public Utilities Commission to suspend retail energy choice immediately in order to facilitate the state’s pending bond sale raises even more doubts.

The Consumer Federation of America recently issued a report declaring restructuring a failure. “There are very, very fundamental problems with this market,” said Mark Cooper, director of research. “There ought to be a moratorium on restructuring. States that haven’t done it shouldn’t do it.”

Yet the market is working well in parts of the Northeast. The PJM, New England and New York operations are sound. Pennsylvania Governor Tom Ridge recently received a report forecasting that deregulation will lead to an increase in the real gross state product of $2.3 billion and 40 700 new jobs in 2005.

Most of the nation’s electric eyes are on Texas right now. Hailed as the antidote to California just a couple of months ago, unanticipated price volatility, computer glitches and transmission constraints have got its Electric Choice pilot programme off to a rocky start. As a result, Shell Energy LLC has withdrawn from the market. Others remain confident that the problems will be resolved. In the wake of Shell’s action, NewPower president and CEO H. Eugene Lockhart reaffirmed his company’s commitment to the Texas programme. “We believe that electricity deregulation is progressing strongly and provides a sustainable market that will only continue to grow,” he said.

Pat Wood, III, the new FERC chair, is expected to be an activist who will push to obtain his agenda. His track record as chair of the Public Utilities Commission of Texas indicates that he will advocate opening markets to competition. President Bush’s energy plan includes expansion of FERC’s authority over transmission siting and interconnection issues. In the meantime, FERC is continuing to promote a transition to four large Regional Transmission Organizations (RTOs) in the belief that broader RTO markets will provide more competition and reduce wholesale costs.

Testifying before the House Energy and Air Quality Subcommittee on September 20, chairman Wood also pointed to the recent attacks and the need for more certainty in the industry as further reason to move swiftly to implement the four RTO concept. However, many in the industry continue to be concerned that this effort may promote competition at the expense of reliability.

Dissatisfied with the pace at which companies were moving toward the RTO goal, the commission ordered 45 days of mandatory mediation by administrative law judges. The first results of that process were issued on September 17 in a report that included a business plan for the development and implementation of a single RTO in the northeast. The plan contemplates that the PJM proposal, based on the procedures of the PJM Independent System Operator, will serve as the platform for the new market and RTO structures.

The question of whether consumers will exercise choice when it is available is still open. Large commercial and industrial customers have the potential to save enough money to create an active market. Residential and small commercial customers, who are likely to see little savings, may not elect to pursue an alternative. The wholesale price of electricity has generally been higher than default generation rates in the last few months, making it difficult to get customers to switch utilities because of price. NewPower targets the mass market by linking energy sales with energy management products and services along with incentives such as frequent flyer miles and gift certificates. Forward price curves were coming down prior to the attack, promising more competitive markets in the future.

Despite the criticisms, the California failure and the distractions of a new war, competition continues to receive the support of Congress, the President, FERC and many in the industry. As long as that is the case, the US is as unlikely to unscramble the deregulation egg, as it is to put together again the fallen pieces of the World Trade Center.

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